Factors Influencing a Company’s Capital Structure
Types of capital structure may vary for different companies. They are determined by the characteristics of the business and the goals it pursues. The two most common models are equity-based and debt-based structures. Companies operating in risky industries with high growth potential are more suitable for an equity-based structure. In this case, the business uses the share capital, increasing it by issuing new shares (Bajaj et al., 2021).
A debt-based structure is more suitable for companies operating in a stable area and striving for rapid development. This model can reduce tax payments and company development costs (Bajaj et al., 2021). However, in this case, the business needs to carefully monitor the debt-equity ratio to avoid negative consequences.
Impact of Organization Size on Capital Structure
In my opinion, a company’s choice of capital structure may be influenced by factors such as the scope of the business, the associated risks, and development and growth prospects. For example, companies operating in areas requiring significant funding may rely more heavily on borrowed funds, while firms specializing in services may use an equity-based structure. In addition, large companies like Microsoft also have more financial capacity to stick to an equity-based structure. It is caused by their reputation among investors, access to capital markets, and a more diversified field of activity. Small companies may have limited equity, which forces them to use a debt-based structure to grow their business.
Comparing Capital Structures: Large vs. Small Companies
An analysis of the annual financial statements of large and small companies has demonstrated a significant difference in their capital structure. The Walt Disney Company is large and uses an equity-based structure in its capital. According to the 2022 annual report, the company’s retained earnings far exceed its long-term liabilities (The Walt Disney Company, 2022).
On the other hand, the small company Cazoo relies heavily on debt capital. According to the financial report, long-term liabilities are more than three times her retained earnings (Cazoo, 2022). When deciding what classes of stock a company should use, it should consider factors such as the current profitability of the business, development prospects, risks, and capital structure.
References
Bajaj, Y., Kashiramka, S., & Singh, S. (2021). Application of capital structure theories: a systematic review. Journal of Advances in Management Research, 18(2), 173-199. Web.
Cazoo. (2022). Fourth quarter and full year 2022 financial results [PDF document]. Web.
The Walt Disney Company. (2022). Fiscal year 2022 annual financial report [PDF document]. Web.