The Importance of Capital Structure in Business Performance
Financing is one of the most important sectors of many organizations, ranging from small to large. According to Ardalan (2017), capital structure is one of the most common aspects of modern finance science. However, when the theory is used incorrectly, businesses might experience bankruptcies and fail to monitor financial changes in performance.
Reasons Behind the Importance of Capital Structure
Based on Ardalan’s (2017) research, capital structure analyzes the combination of debt and equity, which are used in assets and operations. The theory can be seen in companies’ balance sheets that consider the financial aspect. The capital structure usually includes future cash flows and profits. Moreover, loans, preferred stock, and retained earnings play a significant role in the theory. I believe that the financial part of businesses is crucial in performance development, and capital structure is crucial in the process.
Example Demonstrating the Impact of Capital Structure
The most common example of a company that implements a capital structure successfully should make twice as much equity from the debt. However, when the equity is low, the business needs to increase its returns to finance debts and reduce risks. A massive shopping center known as Walmart uses a capital strategy in its daily operations. They produce a successful equity from the debt and manage to sell specific products before paying for them.
For example, Procter & Gamble Co (2022) has shown in the report that Tide and other related items could be sold without the first payment being sent to P&G. They could use this money to grow, and P&G does not lose in this case, as they receive more when the company manages to stand out. Only one formula can be used to calculate the capital structure, which requires dividing debt by equity. It is easy to use the theory and be able to control the financial sector for businesses of different sizes and strategies.
References
Ardalan, K. (2017). Capital structure theory: Reconsidered. Research in International Business and Finance, 39, 696-710. Web.
Procter & Gamble co (2022). TheStreet quant ratings. PG. Web.