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 Financing

    When a firm raises money for working capital or capital expenditures ...
  3. Debt/Equity Ratio

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

    A mix of a company's long-term debt, specific short-term debt, ...
  5. Shareholders' Equity

    A firm's total assets minus its total liabilities. Equivalently, ...
  6. Discounted Future Earnings

    A method of valuation to estimate the value of a firm.
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 are the main differences between a mixed economic system and pure capitalism?

    A mixed economy is one in which the government does not own all of the means of production, but government interests may ... Read Full Answer >>
  3. How does fundamental analysis differ from technical analysis?

    Technical analysis and fundamental analysis are two distinct approaches to equity investment. Fundamental analysis is typically ... Read Full Answer >>
  4. What is an alternative ratio to forward p/e?

    A metric that is an alternative to the forward price to earnings (P/E) ratio is the standard, or trailing, P/E ratio. This ... Read Full Answer >>
  5. What items on the income statement are considered in fundamental analysis?

    Fundamental analysis is a valuation method that equity investors use. Fundamental analysts attempt to establish the intrinsic ... Read Full Answer >>
  6. What does a high capital employed imply about risk?

    The four most common descriptions of capital employed are the total amount of capital that a company utilizes when acquiring ... 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. Charts & Patterns

    Are These the Top 3 Value Stocks of 2015?

    A look at three value plays for the long-term investor.
  5. Professionals

    Understanding Operations Management

    Operations management is concerned with converting materials and labor into goods and services as efficiently as possible to maximize profits.
  6. Economics

    Explaining the Value Chain

    A model of how businesses receive raw materials as input, add value to the raw materials, and sell finished products to customers.
  7. Fundamental Analysis

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.
  8. Investing Basics

    Understanding Risk-Return Tradeoff

    The essence of risk-return tradeoff is embodied in the common phrase “no risk, no reward.”
  9. Fundamental Analysis

    Investment Banks: Not a Good Bet Right Now?

    Investment banks might appear safe to investors at the moment, but they're probably more dangerous than advertised.
  10. Mutual Funds & ETFs

    Top 4 High-Yielding Preferred Stock ETFs

    ETFs offer diversification, a clear advantage. Preferred stock ETFs offer even more.

You May Also Like

Hot Definitions
  1. Coupon

    The interest rate stated on a bond when it's issued. The coupon is typically paid semiannually. This is also referred to ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  4. Standard Error

    The standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the ...
  5. Capital Stock

    The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents ...
Trading Center