Optimal Capital Structure

How much debt? How much cash? How many shareholders? And who? Who do you want owning chunks of your company?

All of these issues come into play when you’re sculpting the optimal capital structure in your company.

But that’s vague. Here's a specific example:

Apple. And/or most big technology companies. They were essentially “too cash wealthy” for very long periods of time. They kept mountains of cash and almost never borrowed money, took out debt. Had Apple, instead of keeping a war chest of $100 billion in cash on their balance sheet, used even half of their free cash flow to buy back stock, their share performance would likely have been even bigger. Same amount of cash flow via huge numbers of iPhones sold. But then maybe a third fewer shares outstanding.

Some industries can't afford to have much debt. They go through huge market and economic cycles. If they had a fair amount of debt at just the wrong time, they could get wiped out. So those companies don't borrow a ton of dough. Tech companies are subject to regular wild swings, hence the reticence to borrow. Other companies, like Comcast, have very steady, stable, predictable cash flows, with low customer volatility. So they're appropriate for borrowing moutnains of cash at times...and they do.

Bottom line: the capital structure...the way the balance sheet is set up...has to mirror the industry and the company's position in it. And hopefully that's not, um...bending over.