A:

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.

RELATED FAQS

  1. What are the pros and cons of using the fixed charge coverage ratio?

    Understand the fixed-charge coverage ratio, and learn the main advantages and disadvantages of using this particular financial ...
  2. What are the disadvantages of using the sinking fund method to depreciate an asset?

    Learn what the sinking fund method of depreciation is, why a company might choose to use it and what the disadvantages are ...
  3. How does inventory accounting differ between GAAP and IFRS?

    Learn about inventory costing differences between generally accepted accounting principles, or GAAP, and International Financial ...
  4. What affects an asset's liquidity?

    Learn about what affects an asset's liquidity, including examples of liquid and fixed assets, and how a company's liquidity ...
RELATED TERMS
  1. Convention Statement

    A document filed by an insurance or reinsurance company that ...
  2. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  3. Nonadmitted Balance

    An item on an insurer’s balance sheet that represents reinsured ...
  4. Earned Premium

    The amount of total premiums collected by an insurance company ...
  5. Best's Capital Adequacy Relativity (BCAR)

    A rating of an insurance company’s balance sheet strength. Best’s ...
  6. Insurance Regulatory Information System (IRIS)

    A collection of databases and tools used to analyze the financial ...

You May Also Like

Related Articles
  1. Investing

    Apple or Google: Which is the Better ...

  2. Fundamental Analysis

    How Microsoft & Apple's Balance Sheets ...

  3. Investing

    What Makes Apple Inc. So Valuable?

  4. Investing

    Analyzing Google's Balance Sheet

  5. Stock Analysis

    Freeport-McMoRan Is Seeking A Helping ...

Trading Center