THOUGHTS ON THEORETICAL AND PRACTICAL - APPLIED ISSUES OF ANALYSIS OF THE COMPANY'S CAPITAL STRUCTURE

Abstract

The issue of enterprise’s capital structure is relevant at all phases and stages of its development. The capital structure has direct impact both on the return of the entire invested capital, and on the return of equity and borrowings as well. The ratios between equity and borrowings and between borrowings and equity directly influence the yield of equity. Furthermore, the use of borrowings to finance the enterprise’s business may turn out to be a factor with positive impact for the improvement of equity yield. This is due to the financial leverage effect.
From the perspective of resources, the enterprise’s capital is invested in, its structure influences both the assets’ turnover – in aggregate and individually in terms of fixed tangible assets and short-term assets, and the asset-based return as well.
This publication is written due to some inconsistent, and I would say, scientifically wrongful statements related to issues of the enterprise’s capital structure. One of these statements provoked me to write this article, and namely, the opinion that the enterprise may close the current reporting period with accounting profit, i.e. positive financial result, but actually, it sustains losses for the same reporting period, as it has used loans from a bank institution for its business, thus “eating” the accounting profit for this period. Such opinion really gives ground for reflection.
The object studied in this publication covers the capital structure, and its subject matter – the ratios between the different components of the enterprise’s capital.
On this basis, this publication highlights the methodology for analysis of enterprise’s capital structure. It provides methodological guidance for the analysis, which is summarized as follows, according to the systemic approach and the methods of scientific knowledge:
1) analysis of the general structure of the capital;
2) analysis of the structure of equity and
3) analysis of the structure of borrowings.
It defines the system of indicators for analysis and assessment of the enterprise’s capital structure.
The author’s objective is to introduce research and creative approaches for analysis of the enterprise’s capital structure. I would expand this objective in terms of the application of these approaches in general, when analyzing all items within the contents of the enterprise’s financial and business analysis.