What is Capital Structure?

Capital structure gives a framework for a company’s makeup and how it finances its operations, because it includes long and short-term debt plus common and preferred equity.

Capital structure is a mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. Often times, investors will want to look at a company’s debt-to-equity ratio as a telltale of what their capital structure is. The higher the debt-to-equity ratio, the more that particular company is borrowing to finance operations versus using cash flow or assets on hand.

Highly levered companies carry more risk, but there could also be potential for greater returns. The capital structure of many startup technology companies, for instance, is sometimes highly debt oriented, because they need to borrow capital to begin operations.

What is the Structure of a Corporation?
What is Capital Accumulation?