Capital Structure Definition, Types, Importance, and Examples

When Meta Platforms, Inc. (META), the company behind Facebook and Instagram, borrowed $10.5 billion in August 2024 while sitting on about $58 billion in cash and cash equivalents, it underlined a crucial point about modern businesses: Even cash-rich tech giants strategically take on debt.

This can seem puzzling—like adding to your credit card debt even when you have the money to pay off your balance. Yet, the example illustrates the sophisticated ways companies organize their capital structure by carefully balancing borrowing and using investor funds to fuel their growth.

A company's capital structure represents how it pays its bills through debt and equity. It reveals whether a business relies more heavily on leverage or borrowing (like loans and bonds) or funds from investors who buy pieces of the company (like stocks).

For everyday investors, understanding a company's capital structure is like getting a financial MRI of the business. Meta's choice to borrow despite its massive cash reserves shows how it's carefully calibrating its funding mix to support strategic initiatives, in this case, the billions in data center and other infrastructure Meta thinks it needs to compete in the AI space.

Financial ratios like debt-to-equity (D/E) and debt-to-capital, available on most investment platforms, give you a quick sense of the capital structure of a firm.

What Is Capital Structure?

A company loaded with debt might offer potential for faster growth but carry more risk, while one funded mainly by stockholders might be more stable but grow more slowly. Hence, it's essential to analyze a company's capital structure. But don't worry, it's not too different from looking at your household finances. Just as you might assess your mortgage and credit card payments versus your retirement and other savings to gauge your financial health, investors use financial ratios to understand how companies are balancing their debt and equity.

The first is the debt ratio—the fraction of total debt to total assets, given as a percentage. For example, if a company has $100 million in assets and $40 million in debt, its debt ratio would be 40%. When evaluating capital structure, context is everything. A 40% debt ratio might be conservative for a utility company but dangerously high for a software startup.

Another key measure is the D/E ratio, which shows whether a company relies more heavily on loans or investor funding. For instance, a D/E ratio of 2.0 means a company has borrowed twice as much money as investors have put in—like having a $200,000 mortgage on a house with $100,000 in equity.

Companies often benefit from debt in ways individuals can't. Interest payments are usually tax-deductible, making borrowing more attractive when interest rates are low. Plus, unlike selling shares to investors, taking on debt means the owners don't have to give up more control of the company by selling more equity. However, too much debt can make a company riskier, just as a large mortgage can strain your household budget.

Understanding the Trade-Offs of Capital Structure

Companies must carefully balance the advantages and risks of different funding sources. Let's break down how businesses make these choices.

Debt can be like a business credit card with benefits. When interest rates are low, borrowing money is typically preferable to selling company shares. Plus, companies can deduct interest payments from their taxes, something they can't do with dividends paid to shareholders. Microsoft Corporation (MSFT), for instance, has strategically taken on debt in recent years despite its massive cash reserves, partly because of these tax advantages.

However, debt comes with strings attached. Companies must make regular interest payments regardless of how well they're performing—just as you would have to still pay your mortgage even if you'd have a pay cut. During the 2020 pandemic, many airlines struggled with their debt payments when travel stopped, showing that fixed-payment obligations can become dangerous in tough times.

Equity funding—raising money by selling shares—offers more flexibility. Companies aren't required to make regular payments to shareholders, and they can cut dividends if times get tough. However, this flexibility comes at a price: selling shares means giving up some company ownership and dividing up future profits even more.

Comparing Capital Structures

As you can see from the table above, companies differ immensely in their D/E ratios, not just because individual companies are doing better or worse, but because each industry has a specific mix of equity and debt that's common.

Conservative Capital Structures

Technology companies like Apple traditionally maintained conservative capital structures, relying primarily on investor funding and retained earnings, which is like running a business mainly with your own savings rather than bank loans. For example, in the early 2010s, Apple had zero long-term debt. Other industries, such as coal and combustible fuels (28.6% as of the first quarter, 2025), are too unpredictable to take on too much debt. Companies and industries choose this approach for the following reasons:

• They want maximum flexibility during economic downturns.
• They generate strong cash flows that can fund growth.
• They have unpredictable revenues.
• They prefer having a safety cushion for unexpected opportunities.

Higher-Debt Capital Structures

Utility companies (175.1% as of the first quarter, 2025) often maintain more debt-laden capital structures, with higher proportions of debt. Companies take this approach for the following reasons:

• They have stable, predictable cash flows.
• They want to grow faster than internal funds allow.
• They see opportunities for growth that exceed their available cash.
• They can benefit from tax deductions on interest payments.

The Bottom Line

How a company funds itself offers critical clues about its strategy and level of risk. While tech giants like Meta might borrow billions to fund AI initiatives despite having huge cash reserves, and utilities might regularly use debt to fund infrastructure, there's no one approach that works best, sometimes even within single industries.

The key for investors is matching a company's capital structure strategy with their own investment goals and risk tolerance while understanding that what works for one firm might spell doom for another.