Capital structure

Capital structure is the mix of debt and equity a company uses to fund itself, how much of the business is financed by borrowing versus by shareholders' own capital.

A company funded mostly by equity carries less financial risk, since it has no fixed debt payments to make regardless of how the business performs, but it may also be giving up the cheaper cost of debt financing and diluting shareholders more than necessary. A company funded more heavily by debt can grow faster without issuing new shares, but fixed interest payments have to be made whether or not the business has a good year, which raises the risk of financial distress in a downturn.

Neither structure is automatically better. A stable, predictable business can comfortably carry more debt than a young or cyclical one, since it can count on steady cash flow to cover the payments. Watching how a company's capital structure changes over time, whether it's taking on more debt to fund growth or paying it down, is one of the clearest signals of how management is choosing to balance risk against growth.