This article throws light upon the top six characteristics of a Good Capital Structure. The characteristics are: 1. Profitability 2. Flexibility 3. Conservatism 4. Liquidity 5. Debt Repayment Capacity 6. Control.
Characteristic # 1. Profitability:
Profit earning is the ultimate object of any business concern. It should be via social service which is called social responsibility. Different types of capital (owned and debt) should be so invested that the most desirable amount of profit can be placed at the disposal of shareholders and debenture-holders, too, remain satisfied.
Characteristic # 2. Flexibility:
Flexibility is another trait of capital structure that adds to its quality. The changes in the capital market should be well adapted to the capital structure. Increase or reduction of capital should not pose any difficulty in a good capital structure.
Characteristic # 3. Conservatism:
Conservatism should be a characteristic not at the cost of flexibility. Current ratio or Debt-Equity ratio should be maintained in ideal form.
Characteristic # 4. Liquidity:
Liquidity should characterize adequate amount of assets. This is needed to avoid shortage of cash, when necessary. Repayment of loan should not be hampered for the dearth of liquid cash. For liquidity, cash inflows and cash outflows should be carefully considered.
Characteristic # 5. Debt Repayment Capacity:
Debt repayment capacity indicates soundness of capital structure. Those types of debt capital should not be raised for which extra cost and risks are involved. The solvency of the company is indicated through its credit—worthiness.
Characteristic # 6. Control:
Controlling capacity at every level of capital structure is a proof of the soundness of the structure. When equity share capital exceeds debt capital, control can be exercised in a better way and, as a consequence, capital structure is said to be good.