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.
Related or Semi-related Video
Finance: What Does "Capital Intensive" M...26 Views
Finance a la shmoop what does capital-intensive mean? lots and lots and
lots and lots of capital yeah that's what it means starting a website, two [Two young kids setting up a website in a garage]
kids a garage and a nice home computer not capital intensive, drilling for oil
in the North Sea highly capital intensive...
well capital needed for the two kids in a garage building a search engine about
two million bucks capital needed for the oil rig well like ten billion bucks and
why does the capital intensity matter well if you can create Google that
generates a few billion dollars of free cash flow a quarter for a total capital
input of maybe a hundred million dollars ie a few rounds after the garage round [Equity investment agreement documents appear]
then investors in it make an absolute killing like if you don't dilute
yourselves and the stock goes up a lot life's good yeah hundreds or thousands
of times their original investment if you create BP British Petroleum or Royal
Dutch Shell or Chevron which also have a few billion dollars of free cash flow a [Cash flowing into fuel tanks]
quarter but it takes you ten billion dollars in capital to generate those
returns then yes you get a nice investment return but it's nothing that
you know Vikings sing songs about and it's the allure of the capital [Man typing on laptop]
unintensive businesses like building a website in Yahoo or a search engine in Google or a video streaming
site in Netflix that takes relatively small amounts of capital to start and
then produces mounds of free cash profits that has made venture
capitalists fall all over themselves hoping to find that one little garage [Person looking through binoculars at garages]
with the next great white whale yeah that's intensive...