What does the term “capital structure” refer to?

The term “capital structure” refers to the mix of debt and equity financing used by a business. Understanding capital structure is crucial for evaluating a company's financial health and risk profile. It involves determining how a company raises funds to support its operations and growth, whether through loans (debt) or through selling shares (equity). A well-balanced capital structure can lower the cost of capital and reduce financial risk, leading to greater profitability and sustainability in the long run.

While other options pertain to various aspects of a business, they do not accurately capture the essence of capital structure. For instance, the location of a business primarily affects logistics and market access rather than its financial framework. The types of products a business offers relate more to its market strategy and competitive positioning. Additionally, the number of employees is more indicative of the organization's size and capacity rather than its financial strategy. Therefore, the correct understanding revolves around how a business finances its operations through a careful combination of debt and equity.