The capital market is like a turbulent ocean, listed companies are ships sailing in it, and capital structure is the keel that supports them in the storm. If the funds are properly arranged, the company can move forward steadily and even sail with the wind; but if the leverage is unbalanced, the stock price will fluctuate at best, and the company will be insolvent at worst, and eventually be swallowed up by the market. In recent years, many companies have fallen into trouble due to unreasonable financing structures, and some companies have achieved soaring through clever leverage operations. Today, Goheal will reveal to you how listed companies play with capital leverage and accurately adjust the capital structure in order to save themselves or even counterattack.
Capital leverage: Is it a good medicine or a poison?
Leverage, in simple terms, is "borrowing money to do big things." After financing, companies invest funds in business operations in order to create higher returns. In theory, reasonable leverage can magnify returns, but excessive leverage may bring unbearable financial risks.
The sources of funds for listed companies in the capital market mainly include equity financing, debt financing and asset securitization. How to find the best balance between these three factors determines the vitality of a company in the market.
Case 1: Proper use of leverage to achieve "capital magic"
Alibaba expanded rapidly through venture capital financing in its early development stage, especially after its listing in 2003, its market value grew rapidly. According to evidence, Alibaba has consolidated its market position through strategic investment and business expansion, and optimized its capital structure through the issuance of convertible bonds and other means.
For example, Alibaba and JD.com raised US$6.5 billion (about S$8.7 billion) through the issuance of convertible bonds in 2024. This financing method not only reduced financing costs but also enhanced shareholder returns. After analysis, Goheal believes that the key to the success of this leverage strategy lies in controlling risks, reducing capital costs and improving capital utilization while ensuring the normal operation of the company.
Case 2: Leverage out of control, falling into the "capital abyss"
On the other hand, Zongmu Technology has conducted multiple rounds of financing since 2015, with a cumulative financing amount of more than 2.2 billion yuan, of which the highest single round of financing amount reached 1 billion yuan, and the valuation once reached 9 billion yuan, attracting investment from well-known institutions such as Xiaomi and Sequoia China.
However, Zongmu Technology's high-leverage financing model eventually led to the break of its capital chain.
Although the funds for listing preparations were exhausted, the company failed to successfully go public, which closed the exit channel of the capital market and made financing more difficult. From 2021 to 2023, the company's net losses accumulated to nearly 1.6 billion yuan, and its operating cash flow was negative for three consecutive years. As of the beginning of 2024, its cash reserves were only 199 million yuan, while its short-term loans were as high as 462 million yuan. This high-leverage operation model quickly exposed its vulnerability when the market environment deteriorated, and eventually led the company into a serious financial crisis. There are countless such cases, reminding companies that leverage cannot be added randomly, otherwise it will burn itself.
Three secrets of capital structure adjustment of listed companies
1. The golden ratio of equity and debt: how to grasp it?
In the capital structure, the ratio of equity financing and debt financing directly affects the operational stability of the company.
Equity financing: suitable for high-growth companies, but equity dilution will affect the control of the founding team.
Debt financing: can speed up the circulation of funds, but excessive use is prone to debt repayment crisis.
How to find the optimal ratio?
1.) Growth-stage companies (such as emerging technology and Internet industries): generally adopt a higher equity financing ratio to reduce debt pressure and retain growth space.
2.) Mature companies (such as consumer and manufacturing leaders): can appropriately increase the debt financing ratio to leverage higher returns, while using stable cash flow to support liabilities.
Goheal once helped a consumer goods company optimize its capital structure. Through a combination of debt restructuring and equity refinancing, the company achieved a 50% asset-liability ratio optimization in just two years, and its stock price rose by more than 80%.
2. Asset securitization: cashing in future cash flows
Asset securitization (ABS) is an innovative financing method, especially suitable for companies with stable cash flow. For example:
Real estate companies can securitize future rental income to obtain large amounts of funds in advance. Supply chain companies can package accounts receivable and issue asset-backed securities to speed up capital recovery.
Goheal's research found that the rational use of ABS can not only optimize the capital structure, but also reduce financial costs and improve the efficiency of capital use, but the premise is that the company must have a stable cash flow, otherwise it is easy to cause a liquidity crisis.
3. Financial leverage + market expectations: creating a "market value magic cube"
Financing for listed companies is not only about solving capital needs, but also a management tool for market expectations. A successful financing plan should not only consider costs, but also the market's confidence in the future development of the company.
For example, the success of Seres is not only reflected in sales, but also closely related to its precise financing strategy. Before 2024, the company had been losing money for four consecutive years, but its stock price rebounded significantly in the first quarter of 2024. This turnaround was mainly due to the company's attraction of financial support through convertible bonds and other means, which further promoted its business development and market recognition. This financing method provides the company with a stable source of funds, and also enhances the market's confidence in its future growth potential.
This shows that:
Financing is not only a means of getting money, but also a tool to shape market confidence! Adjustment of capital structure can become an important factor affecting stock prices!
Conclusion: How can listed companies play the capital game without "turning over"?
Financing, leverage, and capital structure adjustment, these capital market operations can both make companies take off and fall into the abyss. A reasonable capital structure is the cornerstone of a company's long-term and stable growth. Listed companies must master the way to balance financing in order to truly control the capital market.
So, in the current market environment, do you think companies should prefer equity financing or debt financing? Have you ever encountered a case where stock prices fluctuated drastically due to capital structure adjustments? Welcome to leave a message in the comment area and discuss more possibilities of the capital market with Goheal!
[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global M&A holdings. It is deeply involved in the three core business areas of listed company control acquisition, listed company M&A and capital operation. With its deep professional strength and rich experience, it provides companies with full life cycle services from M&A to restructuring to capital operation, aiming to maximize corporate value and achieve long-term benefit growth.
