What does capital structure mean?

Capital structure refers to the value composition and proportional relationship of various capitals in an enterprise, which is the result of financing combination in a certain period of time.

Capital structure refers to the value composition and proportion of various capitals of enterprises. The financing structure of an enterprise, or capital structure, reflects the proportional relationship between corporate debt and equity, determines the debt repayment and refinancing ability of an enterprise to a great extent, and determines the future profitability of an enterprise. It is an important indicator of the financial situation of an enterprise.

A reasonable financing structure can reduce the financing cost, play the regulatory role of financial leverage, and enable enterprises to obtain greater return on their own funds. Capital structure refers to the proportional relationship between equity capital and creditor's rights capital, which reflects the financial relationship of enterprises under the condition of market economy, that is, the interest relationship between shareholders, creditors and operators formed through investment and lending with capital and credit as the link.

Theoretical development

Capital structure theory is an important part of western financial theory. The capital structure theory has gone through two stages: the old capital structure theory and the new capital structure theory. The old capital structure theory is based on a series of strict assumptions, including traditional theory, MM theory and trade-off theory.

The main research results include: under ideal conditions, MM theory draws the conclusion that capital structure has nothing to do with company value; Under the condition of enterprise income tax, MM theory draws the conclusion that enterprise value increases with the increase of liabilities. Under the condition of bankruptcy cost, the conclusion of trade-off theory is that tax avoidance income and bankruptcy cost should be weighed to maximize the company's value.