What is meant by capital structure in a business?

Capital structure refers to the way a company finances its overall operations and growth through various sources of funds, primarily a mix of debt and equity. This concept is crucial for understanding how a business leverages its financial resources to support investment and expansion while managing risks and obligations.

When a company utilizes debt, it typically raises funds through loans or by issuing bonds, which must be repaid over time, often with interest. Equity financing, on the other hand, involves raising capital by selling shares, which gives investors ownership stakes in the company but does not require repayment in the same way debt does.

The balance between these two forms of financing is what defines a company's capital structure. A well-structured capital framework optimally supports the company’s strategy, facilitates growth, influences its cost of capital, and affects the risk profile of the business.

Understanding capital structure is essential for evaluating financial health and making informed decisions related to investment, as it impacts returns and the firm's resilience in different economic conditions.