Microsoft Corporation (NASDAQ: MSFT) is a large software company known for its Windows operating system and Microsoft Office suite of products. The company's capital structure relies more heavily on equity capital than debt for financing, though debt has grown to play an increasingly large role. As the U.S. equity market has risen, MSFT's enterprise value has growth substantially in the three years leading up to April 2016.

Equity Capital

Equity capital refers to the financing a business receives from the sale of equity and the net profits attributable to equity holders. It can include balance sheet items such as common stock at par value, retained earnings, additional paid-in capital and accumulated other comprehensive income. As of December 2016, Microsoft's total stockholder equity was $76.8 billion, consisting of $68.3 billion of common stock and paid-in capital at $0.00000625 par value per share, $6.7 billion in retained earnings and $1.8 billion in accumulated other comprehensive income.

Microsoft's total shareholder equity was $80.1 billion as of the fiscal year ended June 2015, and $89.8 billion at the end of fiscal 2014. From June 2014 through December 2015, Microsoft's common stock and paid-in capital varied by less than $200 million. Accumulated other comprehensive income fell from $3.7 billion in fiscal 2014 to $2.5 billion in fiscal 2015 and $1.8 billion in December 2015. The reduction in Microsoft's shareholder equity value over the three years leading up to December 2015 was driven primarily by falling retained earnings. Although Microsoft was generating positive net earnings over those years, significant amounts of capital were returned to shareholders in the form of cash dividends and share repurchases. In fiscal 2015, the company spent $17.8 billion on buybacks and issued $10.4 billion of cash dividends. In fiscal 2014, the company repurchased $14.4 billion of common stock and paid $9.9 billion in dividends. Through the first six months of fiscal 2016, Microsoft spent $8.4 billion on share repurchases and paid $5.3 billion of dividends.

Debt Capital

Debt capital includes short- and long-term debt such as bonds, unsecured notes and term loans. As of December 2015, Microsoft had short-term debt liabilities of $3 billion, with the current portion of long-term debt at $750 million. The company's long-term debt was $40.7 billion and consisted of various notes with interest rates ranging from 0.875% to 5.2%, resulting in total debt of $44.5 billion.

Microsoft has been issuing an increasing amount of debt. At the end of fiscal 2015, the company had short-term debt of $7.5 billion and long-term debt of $27.8 billion, resulting in total debt of $35.3 billion. Total debt was $22.6 billion at the end of fiscal 2014 and $15.6 billion at the end of fiscal 2013. Microsoft issued $13 billion in bonds in October 2015, following a $10.8 billion bond issuance in February 2015. Moody's rated the company's debt Aaa (the highest possible rating) for the October issuance.

Financial Leverage

To analyze the amount of debt in a company's capital structure, it is necessary to use a financial leverage ratio, such as the debt-to-total-capital ratio. This allows investors to track debt relative to equity capital over time and in comparison to other firms. Microsoft's debt-to-total-capital ratio was 0.37 as of December 2015, up from 0.31 as of the fiscal year ended June 2015 and 0.2 in June 2014. The company's rapid expansion of leverage indicates that management considers the cost of debt capital to be much lower than the cost of equity capital, a condition being supported by sustained low interest rates. For comparison, Oracle Corporation (NYSE: ORCL) had a debt-to-total-capital ratio of 0.47 as of February 2016.

Enterprise Value

Enterprise value (EV) is a measurement of total firm value based on the market values of equity and debt, less cash and investments. As of April 2016, Microsoft had EV of $384 billion, slightly lower than the trailing three-year high of $391 billion. The company's EV grew from $178 billion in 2013, growing 30% on a compounding basis on the three years leading up to April 2016. While debt capital did expand rapidly over that period and financial leverage increased, EV growth was driven by market price appreciation of equity.