Reviewed by Sep 28, 2020| Updated on
What is a Financial Structure?
Financial structure refers to the way a firm's assets are financed. In a balance sheet, the details in the left-hand side mention all the long-term and short-term capital sources.
Understanding Financial Structure
The financial structure is a mix of equity and debt used by a company for operating. It can have a strong influence on the risk and value of the associated business. The financial managers of the company deal with the responsibility of deciding the right mixture of equity and debt to optimise the financial structure.
The financial structure is also called capital structure. Sometimes, financial managers may also have to take a call between managing the business and the capital opportunities that come with the business.
When a business is being set up, there can be a number of choices to make, such as private or public. Based on this choice, the capital structure will vary in terms of the financing options.
Companies receive debt capital from credit investors and repay the sum with interest over time.
Capital is raised through shareholder-investment through equities, which give them a share in the ownership of the company. Shareholders receive returns based on the market value of the gains or distributions.
The mix of equity and debt is decided based on the requirements, expenses, and investor demand.
Analysation Metrics for Financial Structure
When a certain financial structure is designed, it is necessary to analyse the effectiveness of the structure. The metrics remain the same for both public and private companies.
The data from the company's balance sheet gives most of the metrics to analyse the company's financial structure.
- Debt-to-total capital is the primary metric to analyse the structure. This throws light on the share of debt and equities in the company's capital. The higher the ratio, the higher is the company's dependence on debt.