Capital structure refers to the way a company finances its overall operations and growth by using different sources of funds. It is typically composed of a mix of debt (loans, bonds) and equity (stocks, retained earnings). The specific combination of these sources can significantly impact a company’s risk profile, financial stability, and overall valuation.

Characteristics
– Debt Financing: This includes loans and bonds that must be repaid over time, often with interest. It can provide tax benefits since interest payments are usually tax-deductible.
– Equity Financing: This involves raising capital through the sale of shares, which does not require repayment but may dilute ownership.
– Cost of Capital: The overall cost of financing a company, which is influenced by the mix of debt and equity. A higher proportion of debt can increase the cost of capital due to higher risk.
– Financial Leverage: The use of debt to amplify returns on equity. While it can enhance profits, it also increases the risk of financial distress.
– Risk Profile: The capital structure affects the company’s risk, with higher debt levels generally increasing financial risk.

Examples
– A startup may rely heavily on equity financing from venture capitalists, as it may not have the credit history to secure loans.
– A mature company might have a balanced capital structure, using both debt and equity to fund operations and growth, such as issuing bonds while also having a significant amount of retained earnings.
– A real estate company may utilize a high level of debt to finance property acquisitions, taking advantage of low-interest rates to maximize leverage.