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.

BREAKING DOWN '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.

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  5. What role do shareholders play in a capital budget?

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