quality and the capital structure of a company
I both agree and disagree with this statement. I agree in the sense that the quality and the capital structure of a company is objectively the most important aspect of a successful business. However, the size of a business is usually proportionate to its revenue, as long as that business is being run correctly. Scalability with a business is crucial to growth and increasing annual revenue, therefore in most circumstances, a business must grow larger to increase profits. Regardless, if the capital structure of the business is poor, it will not matter whether that business is small or large.
I agree with the statement that regardless of company size, capital structure is extremely important. Capital structure is the balance between debt and equity and is used to finance everything that is required of the company. If it is not focused on as one of the most important pieces to overall success, then day to day operations and future growth can suffer.
Capital structure also plays an important role in the company’s risk profile, as well as how much and at what cost the company will receive investments (Zhu, 2019). Although capital structure can differ from small to large companies, with the larger companies including senior and subordinate debt and preferred and common equity, it is still an extremely important part that cannot be underestimated (Zhu, 2019).
Capital structure plays an important role in identifying all the key players of the business and what their claim is on the company. Debt owners are entitled to a lump sum of the principal while equity owners hold a percentage of the company’s future profits (Zhu, 2019). It is also critical in identifying the risk involved in investing in the company, which will drive the cost of financing up in the form of higher percentage rates required by investors for the riskier involvement in the company (Zhu, 2019). Simply, a company with higher equity over debt is going to find much more eager investors, and this is identified by the capital structure.
Capital structure is also very important in deciding how the company is looking to acquire funding for new assets or future growth. Typically, offering debt to investors lowers the cost of capital because the investors are entitled to first claim on assets if the company goes bankrupt but receive lower returns; while offering equity is often more expensive because of higher return rates due to risk, but with investors only receiving value after debt investors have made their claim (Zhu, 2019).
Overall, capital structure is very important regardless of the size of the company for both the business itself, and the investors.
Zhu, K. (2019, October 17). Capital Structure: What it is and Why it Matters. Axial. https://www.axial.net/forum/why-capital-structure-matters/