A capital structure as per the name suggests, it is the structure of the capital of a company. The capital of a company consists of loans, debts, equity shares, etc. Each of the types of securities or debts has got its own advantages and disadvantages for the company. It is a well calculated and planned decision to create a capital structure and it requires professional help. Based on the amount of equity shares in the total capital of the company, one can say whether the company is 'low geared' or 'high geared'.
What can be considered as a low geared company and high geared company?
A low geared company and high geared company are two different types of companies that can be recognized from the amount of the equity shares in the total capital structure of these companies. To better explain this let us take an example, suppose company A is having a capital of 100 $ in which equity capital is $50 and there is another company B which is having the same capital but the equity capital is 75 $. Here, the company A will be considered to be highly geared company and the company B (with more equity) will be considered to be a low geared company.
What are the factors that are taken into consideration for capital structure?
The decision to keep a particular type of capital structure is that of the top management of the company. The following can be the determining factors for a capital structure;
1) Degree of control: The equity share capital gives the controlling power to the shareholders. So, if more of the equity share capital is kept in the capital structure than the ownership will be more distributed among more number of people and the less of it will be with the board of directors.
2) Diversified structure: The companies intend to attract more investors so that they are able to tab the maximum financial market and use the maximum means of availing the finance to do the business. The various types of sources of capitals and investment opportunities attracts different types of investors, like the equity shares would attract the investors who are bold and adventurous whereas the debentures and bonds attract the more conscious investors.
3) Flexibility: The capital structure should be such which can be changed with the change in the capital market. It should not be rigid, for example, if the time requires than the company should be able to sell back the debentures and be debt free.