How is capital structure defined?

Capital structure refers to the way in which a company finances its operations and growth through various forms of financing, primarily a mix of long-term debt and equity. This definition is pivotal for understanding a company's financial health and operational capacity.

Long-term debt includes loans and bonds that a company must repay over an extended period, while equity represents ownership in the company, either through common or preferred stock. The balance between these two elements of capital structure is essential as it impacts both the cost of capital and the overall risk profile of a business. A well-structured capital framework allows a company to leverage its resources effectively, manage costs, and optimize returns for shareholders.

In contrast, total revenue pertains to the income generated from business activities but does not provide insights into how that income is financed. Operational expenditures relate to day-to-day expenses necessary for running a business and do not reflect the financial strategy regarding funding sources. Lastly, the turnover rate of assets measures how efficiently a company utilizes its assets to generate sales, which is distinct from how these assets are financed. Therefore, understanding capital structure is crucial for evaluating a company's financial strategy and its implications for growth and stability.