Role of Capital Structure in Financial Performance of a Company

The main objective of the firms is to maximize its profits and in the same time minimize its costs, when companies search about resources to finance its investments they take this objective in consideration. The main sources that firms could use to provide the necessary finance are the internal finance which is equity, and the external finance which is debt. Most of companies use a mix between equity and debt which form the capital structure. Capital structure is most significant discipline of company’s operations. This study constitutes an attempt to identify the impact between Capital Structure and Companies Performance, taking into consideration the level of Companies Financial Performance. Capital structure is a financial tool that helps to determine ‘how do firms choose their capital structure?’ a firm’s capital structure is then the composition or structure of its liabilities. The term capital structure should not be confused with financial structure. While financial structure consists of short-term debt, long-term debt and share holders’ fund i.e., the entire left hand side of the company’s Balance Sheet. But capital structure consists of long-term debt and shareholders’ fund. So, it may be concluded that the capital structure of a firm is a part of its financial structure. Capital structure refers to the proportion of long-term debt and equity in the total capital of a company. On the other hand, financial structure refers to the net worth or owners’ equity and all liabilities (long-term as well as short-term).