TABLE OF CONTENTS You'll often hear professional investors talk about "cap structure," which is short for capital structure. In essence, the capital structure is how the company has financed its assets that is, how much it borrowed (called debt) or applied from resources it owned (called equity) to get to its current position. In some cases, the cap structure can be quite bleak with negative equity and huge debt that could plunge a company into bankruptcy.
A company's cap structure appears on the right-hand side of the balance sheet, with liabilities on top and the equity portion on the bottom. As with Jane's business in Chapter 2, the asset side must equal the financing side (that is, the debt and equity).
Investors are often grouped based on the style of investing. For example, growth investors are looking for sales and profit strength and so focus on a company's income statement. Value investors, on the other hand, look mostly at a company's balance sheet.
I'm not promoting any one approach to investing; value, growth, and even technical analysis can all get good results, but the fact is some of the investors with the best long-term records have pursued a value strategy. Peter Lynch, Bill Miller, Warren Buffett, John Neff that's a good group to follow.
For public companies, debt is absolutely necessary. Even a company like Microsoft with over $40 billion in its bank account still has liabilities. After all, at any given time,...
