What is the meaning of capital structure?

Capital Structure is referred to as the ratio of different kinds of securities raised by a firm as long-term finance. The capital structure involves two decisions-

Type of securities to be issued are equity shares, preference shares and long term borrowings (Debentures).

Relative ratio of securities can be determined by process of capital gearing. On this basis, the companies are divided into two-

Highly geared companies - Those companies whose proportion of equity capitalization is small.

Low geared companies - Those companies whose equity capital dominates total capitalization.

For instance - There are two companies A and B. Total capitalization amounts to be USD 200,000 in each case. The ratio of equity capital to total capitalization in company A is USD 50,000, while in company B, ratio of equity capital is USD 150,000 to total capitalization, i.e, in Company A, proportion is 25% and in company B, proportion is 75%. In such cases, company A is considered to be a highly geared company and company B is low geared company.