Capital structure

In balance sheet analysis, capital structure is the composition of a company's total capital from equity and debt . Correspondingly, there on the assets side of the balance sheet , the asset structure .

General

A company's total capital, consisting of equity and debt, finances its total assets. Borrowed capital is available to the company in the short and / or medium and / or long term, while equity is unlimited. The share of equity in total capital is determined with the equity ratio , the corresponding share of debt with the debt ratio . The borrowed capital is subject to interest, the resulting interest expense must be earned through corresponding sales . For this reason, the debt ratio must not be too high, because this would lead to the risk of loss, which would further increase the debt ratio.

species

A general distinction is made between the vertical and horizontal capital structure. In the vertical capital structure , the equity and debt ratio are determined as the ratio of equity and debt to total capital. The horizontal capital structure examines the asset coverage , i.e. to what extent the equity covers the fixed assets and the borrowed capital covers the current assets .

Optimal capital structure

The pioneering irrelevance theses by Franco Modigliani and Merton Miller from June 1958 are the best-known publications on the theory of capital structure. In their essay they assume that in an (unreal) perfect market without taxes , bankruptcy costs , information asymmetry and transaction costs, every capital structure is equally good because changes in the capital structure would have no effect on the company value . In reality, however, company value can be maximized by minimizing the average cost of capital with the given share of equity and debt .

Since there are only imperfect markets in economic practice, knowledge of the existing capital structure is necessary for healthy financing . If the company value is maximized through healthy financing with the help of an optimal dimensioning of equity and debt capital, a so-called optimal capital structure exists.

The financing rules represent practical rules for the optimal (horizontal) capital structure. The golden balance sheet rule states in its strict form that the fixed assets must be covered by equity and that debt capital may be used for the current assets. it is

{\ displaystyle {\ frac {\ text {Equity}} {\ text {Fixed assets}}} \ geq 1}

Investment-intensive companies therefore tend to have a higher equity ratio. In its less strict form ("silver financing rule"), a time-limit agreement between long-term capital and assets is required:

{\ displaystyle {\ frac {{\ text {Equity}} + {\ text {long-term debt capital}}} {\ text {Fixed assets}}} \ geq 1}

According to this, equity and long-term debt capital cover the long-term fixed assets available to the company. Risks of follow-up refinancing and interest rate risks are ideally excluded by matching maturities . Other rules are the one-to-one rule or the golden banking rule .

Financial leverage

The financial leverage describes the influence of the capital structure on the return on equity . With increasing debt, the return on equity increases compared to the return on total capital . A higher debt capital ratio therefore leads to an improvement in the return on equity and vice versa. The only positive thing about a high debt capital ratio is - given the profits - a high return on equity. The higher the debt ratio, the higher the capacity utilization must be so that the breakeven point can be reached and the interest expense can be covered. A high debt capital ratio is therefore regularly accompanied by an increased breakeven point and vice versa. Companies with a high proportion of debt capital therefore suffer from a high employment risk. Asset-intensive and capital-intensive industries are characterized by this structural burden. With a given tax rate, the financial risk of a company can be controlled via financial leverage .

meaning

The economic key figures for the capital structure are important for creditworthiness , earning power and the dependence on creditors . When it comes to ratings by credit institutions and rating agencies , the equity ratio of non-banks plays a key role. Future earning power will be weakened by an excessively high debt capital ratio because the interest expenses reduce profits or lead to losses. This also increases the dependency on creditors (credit institutions require loan collateral , suppliers deliver subject to retention of title ).

Individual evidence

↑ ^a ^b Wolfgang Lück (Ed.), Lexikon der Betriebswirtschaft , 1983, p. 614.
^ Franco Modigliani / Merton Miller, The cost of capital, corporation finance and the theory of investment , in: The American Economic Review 48 of June 3, 1958, pp. 261-297.
↑ Borrowing costs are tax deductible as business expenses in most countries
↑ Marliese Uhrig-Homburg, Borrowing Costs, Credit Risks and Optimal Capital Structure , 2001, p. 187.
↑ Oliver Müller-Känel, Mezzanine Finance: New Perspectives in Corporate Finance , 2009, p. 64.

[lück-1] Wolfgang Lück (Ed.), Lexikon der Betriebswirtschaft , 1983, p. 614.

[2] Franco Modigliani / Merton Miller, The cost of capital, corporation finance and the theory of investment , in: The American Economic Review 48 of June 3, 1958, pp. 261-297.

[3] Borrowing costs are tax deductible as business expenses in most countries

[4] Marliese Uhrig-Homburg, Borrowing Costs, Credit Risks and Optimal Capital Structure , 2001, p. 187.

[5] Oliver Müller-Känel, Mezzanine Finance: New Perspectives in Corporate Finance , 2009, p. 64.