Leverage Ratios
Capital Structure
Capital structure is the mix of debt and equity used to finance a business.
Concept First
Learn It Step By Step
Start with the business meaning, then move into the formula.
What is Capital Structure?
Capital is the funding base behind the business or project. It should be kept consistent with the return measure being studied. Example: use the matching financial statement line item for the same period and keep the unit consistent before calculating.
What is Debt?
Debt means interest-bearing borrowings. Depending on the metric, both short-term and long-term borrowings may matter. Example: working-capital loans, term loans, debentures, and other interest-bearing borrowings.
What is Equity Mix?
Equity means shareholders' funds from the balance sheet, including share capital, reserves, and retained surplus. For example, shareholders' equity includes paid-up share capital, share premium, general reserves, specific reserves, and retained surplus that belong to the owners of the company.
How should I read the answer?
The right mix balances growth funding, control, cost of capital, and financial risk.
Formula Lab
Understand the Formula
Read the formula like a business sentence before calculating it.
Formula
Capital Structure = Debt + Equity Mix
Interpretation
What This Means In Practice
Read the result as a business signal, not as a standalone number.
Debt must be read with repayment capacity
The right mix balances growth funding, control, cost of capital, and financial risk. A leverage number is incomplete until you compare it with EBIT, EBITDA, operating cash flow, interest cost, principal repayment, and stability of earnings.
Risk lens
Capital structure decisions affect leverage ratios, interest coverage, and shareholder risk. Debt can support growth, but it also creates fixed obligations. The danger appears when cash generation weakens before debt service does.
Key Takeaway
Capital structure decisions affect leverage ratios, interest coverage, and shareholder risk.
Practice Checkpoint
Check Your Understanding
Work through the quiz in smaller sets. Your answers stay visible while this page is open, so you can review before moving on.
Question 1 of 20
Level 1Why can too much debt be risky?
Question 2 of 20
Level 1Which ratio directly reflects the result?
Question 3 of 20
Level 1What is a common mistake?
Question 4 of 20
Level 1Which underlying item must you understand before calculating or interpreting the result?
Question 5 of 20
Level 1Which statement is the best conceptual reading of this measure?
15 questions remaining in this lesson.
Completion Tracking
Mark this lesson complete
Saved in this browser.
Continue Learning
Ratio Analysis - An Introduction
Ratio Analysis Foundations
Knowledge Path
Connected Concepts
2 linked lessons