The available forms of financing do not only depend on the current stage of a business in the corporate lifecycle, but there's another layer to the story, the current capital structure.

Think back to our entrepreneur whose company has now reached the maturity stage. Success isn't just about the products anymore, it's about smart financing.

So what do we mean by leverage in the corporate world, this term is akin to using borrowed money or debt to amplify the potential returns of an investment.

It's like using a lever to lift something heavy. A little effort can have a big impact. In companies leverage is a strategy to use debt to fuel growth. Betting that the returns will outweigh the cost of borrowing, but it's a balancing act. Too little leverage, and you might miss out on growth too much and the weight of debt can crush you if things go south.

So how do we measure a company's leverage? One key metric is the debt to equity ratio.

It's a simple division of the company's total debt by its total equity.

The ratio tells us how much a company is relying on debt to finance its assets versus finance with its own funds i.e. equity. Now at the mature stage, a company might be eyeing debt to finance a new venture. Because debt has its perks as we've seen, it's often cheaper than issuing new equity. But here's the catch. If a company is already heavily leveraged, debt investors might balk at the idea of lending even more.

They see the high debt to equity ratio and they worry about the company's ability to repay that debt. It's a risk they may not want to take.

This is where issuing equity can be a strategic move by selling shares, the company can raise funds without increasing debt.

It dilutes the stake of the existing shareholders, but it also dilutes the debt to equity ratio. It reassures debt investors that there's more cushion to absorb potential losses.

But what is considered a good debt to equity ratio? Well, as we've seen earlier in the context of the price to book ratio, there's no single right answer. A good ratio depends on the industry, economic conditions, and individual company circumstances.

Here's a few examples. Industry benchmarks. Different industries have different average debt to equity ratios. For example, capital intensive industries like utilities or telecoms might have higher ratios Because they need to fund expensive infrastructure. On the other hand, tech companies might have lower ratios as they require less capital for physical assets.

Growth prospects. Companies with high growth prospects may have a higher debt to equity ratio because they can take on more debt to fuel their growth, but they're also expected to be able to pay back that debt with higher future earnings.

Interest rates. When interest rates are low, companies might increase their debt because it's cheaper to borrow. This could lead to higher debt to equity ratios. Economic conditions. During economic downturns, companies might reduce debt to lower the risk of being unable to repay the debt, thus improving their debt to equity ratios.

And finally, company age. Younger companies might have higher debt to equity ratios as they borrow to grow. In contrast, mature companies might have lower ratios as they've had time to accumulate earnings and pay down debt.