sieskom.biz.id – Capital structure is the percentage between debt and ownership of the company (Equity vs Debt). The capital structure can change due to policies and actions taken by companies related to funding.
There are at least 10 factors that can affect a company’s capital structure. Here will be described one by one.
Factors Influencing the Company’s Capital Structure
01. Asset Structure (Tangibility)
One of the factors that influence the capital structure is the structure of company assets/assets. You know, we’re discussing capital structure, why even discuss asset structure? And what is the difference between capital structure and asset structure? Every asset owned by the company all comes from the capital structure. As we know, the capital structure consists of debt and equity. So, all assets owned come from debt and company capital. To make it easier what the asset structure looks like, take a look at the balance sheet below Every company has a different capital structure. # How can asset structure affect capital structure? Companies in the service industry have a different capital structure from the manufacturing and trading industries. The asset structure of service industry companies tends to be dominated by fixed assets. Companies tend to prioritize the addition of new capital to acquire fixed assets. Debt is the next alternative.
The asset structure of trading industry companies tends to be dominated by current assets. Trading companies prioritize rather than increase capital. Meanwhile, the asset structure of manufacturing companies tends to be more balanced and more responsive to their needs. But wait a minute. There are other opinions regarding the structure of assets. According to Smart, Gitman and Megginson [2004], companies that have more fixed assets than current assets tend to have higher debt. This is because fixed assets can be used as collateral for debt if the company is experiencing financial difficulties and needs funds from outside the company.
But whatever it is, the point is that there is an influence from the asset structure on the company’s capital structure.
02. Firm Size
Have we ever heard of a small-scale company taking the floor on the stock exchange? issue new stock or bonds? It’s so rare that we almost never hear of it. Small companies do not have access and the ability to be listed on the stock exchange. The capital structure of small companies usually consists of bank debt or retained earnings. Small companies may have low cash flow to invest and tend to be reluctant to work with other parties to become business partners or vice versa, other parties are still reluctant to work with small companies. On the other hand, large companies that have a “name”, reputation and high credibility can easily issue new shares or bonds in the capital market.
Large companies have more and easier options and access to funding compared to small companies. So we can see, company size can affect the company’s capital structure.
03. Company Profitability
Company profitability is how the company generates profit levels in each period. Profitability here is the company’s profit before deducting interest and taxes (earnings before interest and taxes/EBIT). According to Frank and Goyal [2004], companies with high and stable profitability tend to have low debt structures. We all know that companies with high profits or profits must have more internal funds. Retained profits are more than companies that generate little profits. In line with the pecking order theory which prioritizes internal rather than external funding, companies that have abundant profit reserves tend to finance their needs using retained earnings.
High reserves of retained earnings allow companies to meet all their needs without having to take funds from outside the company. This shows the level of company profitability can affect the company’s capital structure.
04. Company Growth Rate (Growth)
Another factor that influences the capital structure is the growth rate of the company itself. Companies that are growing rapidly certainly want to expand their business even more. For example by building a new factory, buying new machines or buying other capital goods that require large funds.
05. Business Risk
The company’s business risk will affect its capital structure. The higher the company’s business risk, the company tends to have difficulty in obtaining funding from external sources. And it will encourage companies to force the use of funds from internal sources. Retained earning.
Example..
A mining company doing exploration. Exploration is an activity of researching, looking for minerals. This activity is not necessarily successful. Not necessarily find the desired mine. But exploration activities require a very large cost. The results are uncertain but the costs incurred are enormous.
The risk is very high. With such a high risk. It is very difficult to find lenders who are willing to give loans. It is very difficult to invite other potential investors to join this company. Everyone is afraid of loss.
Therefore, companies with big risks like this tend to use their internal funds to finance their activities when there is no one else willing to work with.
But, Even though the business risk is high, if the company has a lot of fixed assets. Creditors can provide loans with collateral for fixed assets owned by the company. So debt is the best alternative in business with great risk if retained earnings are insufficient.
06. Enterprise Controlling
The capital structure of the company’s “owners” are creditors and shareholders. And managers are agents of shareholders In carrying out its operational activities, the company will always be faced with agency problems. If you don’t understand what agency problem is, it’s better to read Agency Theory first. One way to overcome the agency problem is to take debt as a source of funding. The goal is to create control from outside the company. Namely creditors. By taking on debt, either in the form of mortgages or bonds. Creditors will also supervise the management of the company so that it continues to have good performance.
Creditors want to ensure that the company is able to pay its debts and interest.So a company that wants outside control must think that this action will change the capital structure with the existence of new debt.
07. Cost of Capital
When a company will choose whether to seek debt or issue new shares, one of the factors that must be taken into account is the cost of capital. Capital costs are costs that must be incurred to obtain funds. Either the funds come from debt or additional equity. The company’s priority is the source of funds that has the lowest cost of capital.
08. Stability of Sales
Product sales performance which is relatively stable has an effect on the company’s cash flow which is also stable. Furthermore, steady cash flow allows companies to take on larger debts. Companies can rely on cash flow from sales as a force to pay off the principal and interest.
In addition to having an effect on cash flow, the level of stability of sales will also affect the level of profitability which is also one of the factors that can affect the company’s capital structure. But there are other opinions regarding the stability of this sale. Kamaludin and Indriani [2002] argue that stable sales will make the company’s debt bigger.
They thought better. Stable sales will make profits increase. Increased profits allow companies to use profits (retained earnings) as a source of their funds. So the company does not need debt anymore. But the point is, regardless of the differences of opinion regarding the stability of sales. All of these opinions agree that the level of stability of sales has an influence on the company’s capital structure.
09. Government Law
In certain industries, government regulations can greatly affect a company’s capital structure. Even the limits on the percentage of debt and equity have been determined. Cannot be violated. Both by state-owned enterprises (BUMN) and even private companies. But not all companies have to comply. Only applies specifically to certain types of industries and companies. The industries and companies in question are companies in the banking industry. Of course, this treatment has gone through a thorough study of why the banking industry is limited in its capital structure.
10. Stakeholder Preferences
The company’s capital structure is decided by the stakeholders (interested parties) involved. Whatever they decide will affect the company’s capital structure. Stakeholders in question are company managers, shareholders and creditors. All parties have a subjective assessment of the capital structure. They have different preferences, views and interests. Some like debt, some don’t. Some like to receive dividends (meaning there will be funding from external sources)
There are those who prefer bonds over the issuance of new shares. There are those who like high risks, there are those who prefer to play it safe. Miscellaneous. But what is clear is that whatever their views. Whatever their decision. The capital structure can be affected by their decisions and actions.
Those were 10 things that could affect a company’s capital structure. If you feel something is missing or inappropriate, please leave a message in the comments column.
Sumber: sieskom.biz.id
