Capital structure in simple words refers to debt equity ratio of a company. In other words it refers to the proportion of debt in the investments of the company. It is important for a company to have an appropriate capital structure; a proper capital structure should have the following features –
1. The capital structure should be such that it gives maximum gain to a company. Since interest rate on debt is a tax deductible expense company should make use of leverage or debt in order to gain tax advantage.
2. Company should not use excessive debt in the capital structure, because in times of higher interest rates it can even threaten the solvency of the company.
3. The capital structure should be flexible enough that is company can alter the debt equity ratio whenever there is need to alter it. For example banks do not give loans to companies if they higher debt equity ratio, in that case it is important to have flexible capital structure.
4. Capital structure should be in congruence with the goals of the company, which implies that if the policy of the company is that company will not take more debt, than capital structure should be framed accordingly and it should have include more equity and less debt.