Capitalization Structure

AAA

DEFINITION of 'Capitalization Structure'

The proportion of debt and equity in the capital configuration of a company. Capitalization structures also refer to the percentage of funds contributed to a firm's total capital employed by equity shareholders, preferred shareholders and debt-holders, in the form of common stock, preferred stock and debt. A company's capitalization structure has a significant bearing on measures of its profitability and financial strength, such as net profit margin, return on equity, debt-equity ratio, interest coverage and so on.

Also known as capital structure.

INVESTOPEDIA EXPLAINS 'Capitalization Structure'

While formulating or amending its capitalization structure, a company has to consider the pros and cons of various sources of capital. For example, equity capital is dilutive, but places less demands on the financial strength of a company. On the other hand, interest payments on debt are generally tax-deductible, but debt increases leverage and, hence, the risk profile of the company.

Although firms in the same business sector will generally have a similar capitalization structure, it varies widely across different sectors. For example, companies in the technology and biotechnology sectors have a capital structure that consists almost entirely of equity or common stock, since they have few tangible assets that can be used as security for debt. On the other hand, debt forms a significant proportion, often exceeding 50%, of the capitalization structure of utilities, due to the capital-intensive nature of their business.

RELATED TERMS
  1. Financial Structure

    The specific mixture of long–term debt and equity that a company ...
  2. Debt/Equity Ratio

    A measure of a company's financial leverage calculated by dividing ...
  3. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
  4. Debt Financing

    When a firm raises money for working capital or capital expenditures ...
  5. Shareholders' Equity

    A firm's total assets minus its total liabilities. Equivalently, ...
  6. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
RELATED FAQS
  1. How does a company's capitalization structure affect its profitability?

    The capitalization structure of a business is its foundation. From its first sale to the projects in which it invests down ... Read Full Answer >>
  2. What happens to the company stock if a subsidiary gets spun off?

    When a subsidiary gets spun off, the company's stock tends to drop. However, the investor in the stock does not lose any ... Read Full Answer >>
  3. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  4. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Book value of equity per share (BVPS) is a ratio used in fundamental analysis to compare the amount of a company's shareholders' ... Read Full Answer >>
  5. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  6. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    Evaluating A Company's Capital Structure

    Learn to use the composition of debt and equity to evaluate balance sheet strength.
  2. Investing Basics

    How To Evaluate A Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  3. Bonds & Fixed Income

    Investors Need A Good WACC

    Weighted average cost of capital may be hard to calculate, but it's a solid way to measure investment quality.
  4. Investing Basics

    Understanding Related-Party Transactions

    In business, a related-party transaction refers to a transaction where parties on both sides have a common interest or relationship.
  5. Fundamental Analysis

    Understanding the Profitability Index

    The profitability index (PI) is a modification of the net present value method of assessing an investment’s attractiveness.
  6. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  7. Economics

    What is Neoliberalism?

    Neoliberalism is a little-used term to describe an economy where the government has few, if any, controls on economic factors.
  8. Fundamental Analysis

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  9. Stock Analysis

    3 Stocks To Buy and Hold For the Rest of 2015

    One of the dominant themes to consider for 2015 is the normalization of monetary policy as the Fed raises interest rates.
  10. Fundamental Analysis

    Are Fast-Casual Restaurants Overvalued?

    Can fast-casual restaurants actually grow to the levels that investors believe they can?

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!