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Study Notes

Capital Structure

Level:
A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 7 Aug 2019

The capital of a business represents the finance provided to it to enable it to operate over the long-term. The capital structure refers to the balance of this finance in terms of how much is equity (or share capital) and how much is is in the form of debt.

There are two parts to the capital structure of a business:

EQUITY

This is the capital provided by shareholders or the owners of a business. Equity capital includes:

  • Share capital invested into the business
  • Profits retained in the business rather than paid out to the owners

DEBT

Debt comes in various forms, but the most common types of debt are:

  • Long-term business loans
  • Mortgages

GEARING AND THE CAPITAL STRUCTURE

A financial ratio that considers the capital structure of a business is the gearing ratio.

This examines the relative mix of debt capital as compared with the total capital employed by a business.

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