Complete capitalization refers to the long-term Obligation obligations of a society, and the fairness on the business's balance sheet. Capital structure is another name used for total capitalization. A company uses total capitalization information for the balance sheet to make decisions on the company's ability to fund projects, expansions and product development.
Obtaining Capital
Debt and equity are the two primary methods used by companies to access capital. Macro- and micro-economic conditions, in combination with internal corporate conditions, allow a company to evaluate the best methods for accessing capital, and the best time to access the capital. Companies can access capital by issuing equity through the sale of shares or by issuing debt through bond sales. After examining a company's total capitalization information on the balance sheet, financial analysts and investors can make decisions about the financial health of the company. When a company decides to issue equity or debt, it can choose to issue several different types. The investor receives a percentage of equity based on the percentage of shares owned by the investor, relative to the total outstanding shares. Additionally, an investor receives voting rights for each share of common stock held. Further, common shareholders' stock entitles an investor to receive dividend distributions on a quarterly or yearly basis.
These equity or debt options appear on the company's balance sheet and constitute a part of the company's total capitalization.
Shareholder Equity
Common stock is the most frequently used form of equity, and represents the number of shares issued in the financial markets that investors can buy and sell at the price dictated by the market. Investors receive partial equity ownership of the company when purchasing common stock.Preferred Stock
Total capitalization also includes preferred stock. Investors typically pay less for preferred shares of stock compared to common shares. Additionally, the price of preferred stock typically does not fluctuate as much as common stock prices. Common stockholders can earn profits from an appreciating stock price, while preferred shareholders generally receive the majority of profits from dividend distributions. The company pays these dividends at a predetermined rate. In the event a company cannot pay its debt obligations, preferred shareholders will receive any liquidation funds prior to common shareholders.
Bonds
Bonds are a type of long-term debt obligation that appears on a company's balance sheet as part of the company's total capitalization. Bond issues can last up to 30 years, and investors become lenders by purchasing the debt. In the event a company becomes insolvent, the company cannot pay the required bond interest payments. When this happens, the largest bondholders can sometimes take control of the company. Too much debt on a company's balance sheet in relation to equity can cause problems for the company, and may result in a decrease to the company's credit rating by third-party ratings agencies.
