So-called "fair capital," like beauty, is in the eye of the beholder.

In financial reporting, there are two kinds of capital: debt and equity. In a company's balance sheet, the former is generally considered to be a company's long-term debt and the latter is identified as total shareholders' equity (paid-in capital, additional paid-in capital and retained earnings).

Investors can look at a company with relatively little debt and a high equity position two ways: as being "over capitalized" by not taking advantage of leverage to fund the growth and expansion of its operations, or, on the other hand, as representing a strong financial position that is capable of withstanding adverse circumstances related to the economy, its industry and/or seriously aggressive competition.

There is no one-size-fits-all position for a company's debt-equity relationship, which can vary according to a company's size, competitive position and industry characteristics.
Companies that are highly leveraged (under-capitalized) compared to those that that carry little or no debt (over-capitalized) represent distinct investing opportunities. When considering such opportunities, investors need to carefully assess the risk-reward consequences for both positions and decide which one fits their risk tolerance levels.

To learn more, read Evaluating A Company's Capital Structure.

  1. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  2. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  3. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  4. What are working capital costs?

    Working capital costs (WCC) refer to the costs of maintaining daily operations at an organization. These costs take into ... Read Full Answer >>
  5. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  6. Does unearned revenue affect working capital?

    Unearned revenue, or deferred revenue, typically represents a company's current liability and affects its working capital ... Read Full Answer >>
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