Capital Structure

Debt is cheaper and leaves ownership alone, and it brings obligations that fall due whether or not the business is performing. Equity makes no fixed claim and costs more, and it dilutes the people who already own the company. Almost every real capital structure sits somewhere between the two, with hybrid instruments used to borrow features from each. The ratio itself is the straightforward part. What matters is how the structure behaves when earnings fall.

That requires looking past the marginal cost of each source. Covenant headroom comes first: how far EBITDA can fall before a leverage or interest cover test is breached, and what happens in the quarter after that. Then the maturity profile, because a cluster of maturities in one year is a refinancing wall whether or not the business is healthy when it arrives. Then the fixed and floating mix, which decides how much of any rate move lands on the income statement.

Rating agency treatment matters where a company is rated or intends to be, since hybrids, leases, and pension deficits are not always counted the way the accounts count them. We assess all of this against the business in front of us: how stable the cash flows are, how much flexibility the owners want to keep, and what each option does to control. Sector median leverage tells you what peers have done. It says little about what this business can carry.