A:

So-called "fair capital," like beauty, is in the eye of the beholder.

In financial reporting, there are two kinds of capital: debt and equity. In a company's balance sheet, the former is generally considered to be a company's long-term debt and the latter is identified as total shareholders' equity (paid-in capital, additional paid-in capital and retained earnings).

Investors can look at a company with relatively little debt and a high equity position two ways: as being "over capitalized" by not taking advantage of leverage to fund the growth and expansion of its operations, or, on the other hand, as representing a strong financial position that is capable of withstanding adverse circumstances related to the economy, its industry and/or seriously aggressive competition.

There is no one-size-fits-all position for a company's debt-equity relationship, which can vary according to a company's size, competitive position and industry characteristics.
Companies that are highly leveraged (under-capitalized) compared to those that that carry little or no debt (over-capitalized) represent distinct investing opportunities. When considering such opportunities, investors need to carefully assess the risk-reward consequences for both positions and decide which one fits their risk tolerance levels.

To learn more, read Evaluating A Company's Capital Structure.

RELATED FAQS
  1. Is a company's paid in capital affected by the trading of its shares in the secondary ...

    Find out why the buying and selling of stock on the secondary market has no impact on the amount of paid-in capital generated ... Read Answer >>
  2. How do dividend distributions affect additional paid in capital?

    Find out how the issuance of dividends can affect the additional paid-in capital subaccount of a company's balance sheet; ... Read Answer >>
  3. Which is more important when estimating cost of capital - debt or equity?

    Learn about the relative costs of debt and equity and how they affect the overall cost of capital, including why debt may ... Read Answer >>
  4. What are the Components of Shareholders' Equity?

    Understanding company valuation figures, such as shareholders' equity, is crucial in assessing a business. Read Answer >>
  5. How do interest rates influence a corporation's capital structure?

    Learn about how changing interest rates can affect a corporation's capital structure because of their impact on the cost ... Read Answer >>
  6. What is the difference between cost of debt capital and cost of equity?

    Learn about how the costs of debt and equity capital differ and how to calculate each using interest and tax rates and stock ... Read Answer >>
Related Articles
  1. Investing

    Evaluating a Company's Capital Structure

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

    Amazon Stock: Capital Structure Analysis (AMZN)

    Analyze Amazon's capital structure to determine what roles equity and debt play in financing operations. How has Amazon's financial leverage changed over time?
  3. Investing

    UPS Stock: Capital Structure Analysis

    Analyze UPS' capital structure to determine the relative importance of debt and equity financing. Identify the factors influencing financial leverage trends.
  4. Investing

    Google Stock: Capital Structure Analysis (GOOGL)

    Analyze Alphabet's capital structure to determine how it has changed over time and how it compares to similar companies.
  5. Managing Wealth

    Learn The Lingo Of Private Equity Investing

    Once, only sophisticated investors worried about the private equity industry. But now, mainstream investors are developing an interest as well.
  6. Investing

    Microsoft Stock: Capital Structure Analysis (MSFT)

    Analyze Microsoft's capital structure to determine the roles of debt and equity in its financing, and explore what these trends say about the cost of capital.
  7. Small Business

    Facebook Stock: Capital Structure Analysis (FB)

    Analyze Facebook's capital structure to identify trends and atypical characteristics. Find out why the company uses equity capital and carries no debt.
  8. Investing

    Learn The Lingo Of Private Equity Investing

    Because of the non-public nature of private equity, it can be difficult to the learn the lingo. We break it down here.
  9. Investing

    Twitter Stock: Capital Structure Analysis (TWTR)

    Analyze Twitter's capital structure to understand the importance of equity and debt financing. Identify trends in financial leverage and enterprise value.
RELATED TERMS
  1. Capital

    1) Financial assets or the financial value of assets, such as ...
  2. New Issue

    A reference to a security that has been registered, issued and ...
  3. Overcapitalization

    When a company has issued more debt and equity than its assets ...
  4. Stockholders' Equity

    The portion of the balance sheet that represents the capital ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements ...
  6. Capitalization

    Capitalization, in accounting, is when the costs to acquire an ...
Hot Definitions
  1. Debt/Equity Ratio

    The D/E ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders’ equity.
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  5. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  6. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
Trading Center