Definition
Capital structure is the mix of debt and equity used to finance a business. It drives risk, flexibility, and the weighted cost of capital.
Formula
Debt ratio = debt / (debt + equity)
Example
If debt is $2M and equity is $3M, the debt ratio is 2 / 5 = 40%.
How to use it
- Match debt levels to cash flow stability and downside risk tolerance.
- Revisit structure after large funding rounds or major capex plans.
Common mistakes
- Assuming a single target ratio fits every business stage.
- Ignoring covenants and refinancing risk when adding leverage.
Measured as
Debt ratio = debt / (debt + equity)
Misused when
- Assuming a single target ratio fits every business stage.
- Ignoring covenants and refinancing risk when adding leverage.
Operator takeaway
- Match debt levels to cash flow stability and downside risk tolerance.
- Revisit structure after large funding rounds or major capex plans.
- Tie Capital Structure to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read WACC explained: how to estimate a discount rate for DCF if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Capital Structure belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- WACC explained: how to estimate a discount rate for DCF: A practical guide to WACC: what it is, how to compute it, and how to use it (carefully) as a DCF discount rate.
- Fundraising & valuation hub: pre/post-money, SAFEs, notes, and liquidation prefs: A practical hub for startup fundraising and valuation basics: pre/post-money, pro rata, option pool shuffle, SAFE/note conversion, and liquidation preference outcomes.