A company's total capitalization represents long-term debt obligations in addition to equity on a balance sheet. Also referred to as capital structure, total capitalization is what companies across industries depend on to fund expansions, projects and product development. Debt and equity are the two primary ways that a company accesses capital, and there are macroeconomic and internal corporate conditions that determine which form is appropriate to issue and when. By examining a company's total capitalization, investors and financial analysts are better able to assess the financial health of a balance sheet.
When a company decides to issue equity, there are different types of securities to choose from. All types of shareholder equity are reflected and detailed on a company's balance sheet to constitute a portion of total capitalization. Common stock is the most common form of equity, and it represents the number of shares that are issued in the financial markets for investors to buy and sell for a stock price. Investors obtain partial equity ownership of a company based on the percentage of shares owned. For each share of common stock held, an investor receives voting rights for major corporate events. Additionally, common shareholders become eligible for dividend distributions in the form of cash or additional stock on a quarterly or yearly basis.
Preferred stock also comprises a portion of total capitalization. These shares differ from common equity shares in that not as many shares are typically traded and the stock price does not fluctuate as much as common stock does. Unlike common stockholders, who earn profits from an appreciating stock price coupled with dividends, preferred shareholders generate much of their profits from consistent dividend distributions paid by a company at a predetermined rate.
Bonds constitute part of total capitalization on a company's balance sheet in the form of long-term debt obligations. These bond issues could last as long as 30 years. Companies issue debt, and investors become lenders.
A company must continue to pay investors ongoing interest payments out of total capital for the life of the bond until a maturity date. Before issuing debt, managers must be prepared to be disciplined with profits so that lenders are paid. In the event that a company is forced into bankruptcy and interest payments are missed, the largest bondholders could take control of the company. Too much debt on a balance sheet in relation to equity could damage a company's credit rating as issued by a third-party agency.
