Optimal capital structure refers to

Optimal capital structure refers to the capital structure with the lowest total cost of capital within the maximum funding risk that a company can tolerate. The greatest funding risk can be expressed in debt ratio. The most important issue in determining the optimal capital structure is how to determine the appropriate amount of debt and maintain a reasonable debt ratio in order to achieve the optimal combination of risk and compensation. Financing risk. But total capital is a higher cost. In addition, it is not possible to benefit from the financial leverage provided by debt management, and if there is too much debt capital, income cannot be maximized. You can reduce a company's total cost of capital and increase its revenue, but it can pose greater financial risk. Therefore, companies need to perform a special cost of capital and risk analysis prior to financing, calculate the ratio of equity to debt capital that can adjust the capital structure, and determine the optimal capital structure. When the return on assets rises, we will increase the debt ratio, increase the financial leverage coefficient, and take full advantage of the benefits of financial leverage. When the return on assets declines. It is this "double-edged sword" that will eventually lower the debt ratio to prevent financial risk and utilize financial leverage.