What aspect of finance does "capital structure" refer to?

Capital structure refers specifically to the mix of debt and equity financing that a company uses to fund its operations and growth. This concept is crucial because it directly impacts a company's financial stability, risk profile, and cost of capital. A well-structured capital framework allows a business to optimize its financing costs and maximize shareholder value.

When a company decides how much debt to carry versus how much equity to issue, it weighs the benefits of debt—such as tax advantages and lower costs of capital—against the risks associated with higher leverage, like increased financial obligations and potential bankruptcy. Conversely, relying more on equity can dilute ownership but also provides a financial cushion in downturns since there are no required payments on equity capital.

In summary, understanding capital structure is essential for evaluating how a business is financed and how it can grow sustainably while managing risks and costs effectively.