Cahero Capital I Capital Structure

CAPITAL STRUCTURE

CUSTOMIZE YOUR CAPITAL NEEDS

 

 

Overview

The judicious use of a company's debt and equity is a key indicator of a strong balance sheet. A healthy capital structure that reflects a low level of debt and a large amount of equity is a positive sign of the quality of the investment.

By measuring: working capital, assets performance, and capital structure, we assess the strength of a company's balance sheet and, therefore, its performance.

Capital Structure is a type of financing that supports the growth of a company and related assets, it describes the combination of long-term capital, which is a combination of debt and equity. Through Capital Structure, we design a customized strategy to fulfill your business needs, generating organic growth.

KEY TAKEAWAYS

  • Capital structure is how a company funds its overall operations and growth.

  • Equity is a company's common and preferred stock plus retained earnings.

  • Debt typically includes short-term borrowing, long-term debt, and a portion of the principal amount of operating leases and redeemable preferred stock.

  • Important ratios used to analyze capital structure include the debt ratio, the debt-to-equity ratio, and the long-term debt to capitalization ratio.

  • The debt-to-equity (D/E) ratio is useful in determining the riskiness of a company's borrowing practices.

 

 

Structuring process

Cahero Capital I Stage One

STAGE ONE

Pre-Agreement Analysis

We assess your current structure, the feasibility of your goals, the industry environment, and global economic trends that could, directly and indirectly, affect your short, medium, and long-term goals.

Cahero Capital I Stage Two

STAGE TWO

Engagement

Execution of the Memorandum of Agreement (MOA) between the client and Cahero Capital. An MOA is a legally binding document written between parties to work cooperatively together on an agreed project to accomplish an agreed objective. The purpose of an MOA is to have a written formal understanding of the agreement between parties.

Cahero Capital I Stage Three

STAGE THREE

Due Diligence

Due diligence is an investigation, audit, or review performed to confirm facts or details of your business. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

Cahero Capital I Stage Four

STAGE FOUR

Structuring

We establish the technical, legal, and economic instruments, to create a customized capital structure, that will give feasibility to your business objectives in the short, medium, and long-term capitalization goals.

Cahero Capital I Stage Five

STAGE FIVE

Soliciting

We start the capitalization process, through a schedule that allows us to establish the capital demand for your business in an organized and coherent manner; minimizing the risks of the company's expansion.

Cahero Capital I Stage Six

STAGE SIX

Closing

We establish the execution of the investments, in compliance with the previously structured objectives, manage the agreements, and audit the funds. We execute the subscription of insurance policies that protect the interests of the investments and the company.

 

 

 

Understanding Capital Structure

Both debt and equity can be found on the balance sheet. Company assets, also listed on the balance sheet, are purchased with debt or equity. Capital structure can be a mixture of a company's long-term debt, short-term debt, common stock, and preferred stock. A company's proportion of short-term debt versus long-term debt is considered when analyzing its capital structure.

When analysts refer to capital structure, they are most likely referring to a firm's debt-to-equity (D/E) ratio, which provides insight into how risky a company's borrowing practices are. Usually, a company that is heavily financed by debt has a more aggressive capital structure and therefore poses a greater risk to investors. This risk, however, may be the primary source of the firm's growth.

Debt is one of the two main ways a company can raise money in the capital markets. Companies benefit from debt because of its tax advantages; interest payments made as a result of borrowing funds may be tax-deductible. Debt also allows a company or business to retain ownership, unlike equity. Additionally, in times of low-interest rates, debt is abundant and easy to access.

Equity allows outside investors to take partial ownership of the company. Equity is more expensive than debt, especially when interest rates are low. However, unlike debt, equity does not need to be paid back. This is a benefit to the company in the case of declining earnings. On the other hand, equity represents a claim by the owner on the future earnings of the company.

Special Considerations

Companies that use more debt than equity to finance their assets and fund operating activities have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and an aggressive capital structure can also lead to higher growth rates, whereas a conservative capital structure can lead to lower growth rates.

IMPORTANT: It is the goal of company management to find the ideal mix of debt and equity, also referred to as the optimal capital structure, to finance operations.

Analysts use the D/E ratio to compare capital structure. It is calculated by dividing total liabilities by total equity. Savvy companies have learned to incorporate both debt and equity into their corporate strategies. At times, however, companies may rely too heavily on external funding and debt in particular. Investors can monitor a firm's capital structure by tracking the D/E ratio and comparing it against the company's industry peers.

 

 

Common Questions and Answers

Why Do Different Companies Have Different Capital Structure?

Firms in different industries will use capital structures better suited to their type of business. Capital-intensive industries like auto manufacturing may utilize more debt, while labor-intensive or service-oriented firms like software companies may prioritize equity.

How Do Managers Decide on Capital Structure?

Assuming that a company has access to capital (e.g. investors and lenders), they will want to minimize their cost of capital. This can be done using a weighted average cost of capital (WACC) calculation. To calculate WACC the manager or analyst will multiply the cost of each capital component by its proportional weight.

How Do Analysts and Investors Use Capital Structure?

A company with too much debt can be seen as a credit risk. Too much equity, however, could mean the company is underutilizing its growth opportunities or paying too much for its cost of capital (as equity tends to be more costly than debt). Unfortunately, there is no magic ratio of debt to equity to use as guidance to achieve real-world optimal capital structure. What defines a healthy blend of debt and equity varies depending on the industry the company operates in, its stage of development, and can vary over time due to external changes in interest rates and regulatory environment.

What Measures Do Analysts and Investors Use to Evaluate Capital Structure?

In addition to the weighted average cost of capital (WACC), several metrics can be used to estimate the suitability of a company's capital structure. Leverage ratios are one group of metrics that are used, such as the debt-to-equity (D/E) ratio or debt ratio.