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. Cape Cod Method

    A method used to calculate loss reserves that uses weights proportional ...
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. To what extent will changing fuel costs affect the profitability of the airline industry?

    Fuel costs represent one of the biggest expenses for the aerospace and airline industries. On average, fuel costs account ... Read Full Answer >>
  3. What debt to equity ratio is common for a bank?

    The average debt-to-equity ratio for retail and commercial U.S. banks, as of January 2015, is approximately 2.2. For investment ... Read Full Answer >>
  4. What is the average profit margin for a company in the banking sector?

    The average net profit margin for retail or commercial banks, as of January 2015, is approximately 18%. This compares favorably ... Read Full Answer >>
  5. How can an investor evaluate the leverage of an insurance company?

    For investors conducting fundamental analyses of insurance companies, leverage can have multiple definitions. Insurance leverage ... Read Full Answer >>
  6. What is the usual profit margin for a company in the insurance sector?

    The best estimates of the average insurance company net profit margin are between 3 and 8%, with a likely median average ... 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

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  5. Fundamental Analysis

    Calculating Future Value

    Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.
  6. Economics

    What is Deadweight Loss?

    Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  7. Investing

    The Strong Dollar’s (Real) Toll On Tech Stocks

    A large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand from many U.S. tech firms.
  8. Investing

    What A Rate Hike May Mean For Stocks

    By the end of the year, investors will likely be contending with the first Federal Reserve (Fed) rate hike in nearly a decade.
  9. Fundamental Analysis

    How to Calculate a Coverage Ratio

    In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders.
  10. Economics

    How to Do a Cost-Benefit Analysis

    The benefits of a given situation or business-related action are summed and then the costs associated with taking that action are subtracted.

You May Also Like

Hot Definitions
  1. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  2. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  3. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  4. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
Trading Center