Capital structure

Capital structure refers to how a firm uses debt and equity in different proportions to finance its operations. Some firms might finance most of their operations through the use of debt while others may be debt-free and be completely financed through equity capital provided by the owners.

A firm with a relatively high proportion of debt financing its operations compared to the size of its equity is generally considered to be riskier than one that is financed primarily through equity. At the same time, since the use of leverage helps to multiply the size of overall gains, the use of debt can help the owners of a firm earn a higher return on their investment.