How to analyze the capital structure of a company?

It is the result of corporate financing, which determines the ownership of the enterprise, and also stipulates the rights and interests of different investment subjects as well as the risks they bear.

In a general sense, capital structure refers to the proportionate relationship between equity capital and debt capital, which reflects the financial relationship of an enterprise under the conditions of a market economy, i.e., the relationship of mutual interests among shareholders, bondholders and operators, which is constituted by investment and borrowing with capital and credit as the link.

In a sense, capital structure is also the structural arrangement of property ownership. And property ownership often ultimately corresponds to the right to income, so the capital structure is related to the arrangement of property rights, or the capital structure determines the structure of property rights arrangements.

The ratio of a company's liabilities to its equity is usually expressed as the ratio of liabilities or liabilities to total assets. Western financial scientists have conducted many theoretical and empirical studies on capital structure but there are still many disagreements until now.

Capital structure in this context refers to the enterprise's debt situation. Reasonable or not, the capital structure directly affects the financial position of the enterprise, the debt ratio should not be more than 50% of long-term liabilities and short-term liabilities should be appropriate.

Effects of Capital Structure

One is that maintaining a reasonable capital structure is conducive to increasing enterprise value. Debt financing can bring financial leverage gains and tax-saving gains to enterprises. When the EBITDA margin of total assets is greater than the cost of debt ratio, enterprises carrying out debt financing can obtain financial leverage gains and increase the value of enterprises; enterprises carrying out debt financing can bring tax-saving gains and increase the value of enterprises.

The second is to influence the enterprise value by influencing investors' judgment on the enterprise's operating condition and investment decision, the capital structure conveys information about the enterprise value to the external investors and influences the external investment decision, which affects the enterprise value, the managerial shareholding and the active repurchase of the equity are regarded by the investor as a signal of the good prospect of the enterprise, which is due to the risk taken by the manager.

Thirdly, it affects enterprise value by influencing the corporate governance structure; debt financing can motivate business operators to work hard and choose the right behaviors, which transmits signals of business performance to the market and helps external investors make correct judgments about the future operating status of the enterprise.

Baidu Encyclopedia-Capital Structure