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What Is Capital Structure?

Dynamics of debt and equity, optimal capital structure.

• Capital Structure FAQs

The Bottom Line

• Corporate Finance
• Corporate Finance Basics

Capital Structure Definition, Types, Importance, and Examples

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth.

Equity capital arises from ownership shares in a company and claims to its future cash flows and profits. Debt comes in the form of bond issues or loans, while equity may come in the form of common stock, preferred stock , or retained earnings. Short-term debt is also considered to be part of the capital structure.

Key Takeaways

• Capital structure is how a company funds its overall operations and growth.
• Debt consists of borrowed money that is due back to the lender, commonly with interest expense.
• Equity consists of ownership rights in the company, without the need to pay back any investment.
• The debt-to-equity (D/E) ratio is useful in determining the riskiness of a company's borrowing practices.

Investopedia / Matthew Collins

Both debt and equity can be found on the balance sheet . Company assets , also listed on the balance sheet, are purchased with debt or equity. Capital structure can be a mixture of a company's long-term debt, short-term debt, common stock, and preferred stock. A company's proportion of short-term debt versus long-term debt is considered when analyzing its capital structure.

When analysts refer to capital structure, they are most likely referring to a firm's debt-to-equity (D/E) ratio, which provides insight into how risky a company's borrowing practices are. Usually, a company that is heavily financed by debt has a more aggressive capital structure and, therefore, poses a greater risk to investors. This risk, however, may be the primary source of the firm's growth.

Debt is one of the two main ways a company can raise money in the capital markets. Companies benefit from debt because of its tax advantages; interest payments made as a result of borrowing funds may be tax-deductible. Debt also allows a company or business to retain ownership, unlike equity. Additionally, in times of low interest rates, debt is abundant and easy to access.

Equity allows outside investors to take partial ownership of the company. Equity is more expensive than debt, especially when interest rates are low. However, unlike debt, equity does not need to be paid back. This is a benefit to the company in the case of declining earnings . On the other hand, equity represents a claim by the owner on the future earnings of the company.

Companies that use more debt than equity to finance their assets and fund operating activities have a high leverage ratio and an aggressive capital structure. A company that pays for assets with more equity than debt has a low leverage ratio and a conservative capital structure. That said, a high leverage ratio and an aggressive capital structure can also lead to higher growth rates, whereas a conservative capital structure can lead to lower growth rates.

Analysts use the D/E ratio to compare capital structure. It is calculated by dividing total liabilities by total equity. Savvy companies have learned to incorporate both debt and equity into their corporate strategies. At times, however, companies may rely too heavily on external funding and debt in particular. Investors can monitor a firm's capital structure by tracking the D/E ratio and comparing it against the company's industry peers.

It is the goal of company management to find the ideal mix of debt and equity, also referred to as the optimal capital structure , to finance operations.

Why Do Different Companies Have Different Capital Structure?

Firms in different industries will use capital structures better suited to their type of business. Capital-intensive industries like auto manufacturing may utilize more debt, while labor-intensive or service-oriented firms like software companies may prioritize equity.

How Do Managers Decide on Capital Structure?

Assuming that a company has access to capital (e.g. investors and lenders), they will want to minimize their cost of capital . This can be done using a weighted average cost of capital (WACC) calculation. To calculate WACC the manager or analyst will multiply the cost of each capital component by its proportional weight.

How Do Analysts and Investors Use Capital Structure?

A company with too much debt can be seen as a credit risk. Too much equity, however, could mean the company is underutilizing its growth opportunities or paying too much for its cost of capital (as equity tends to be more costly than debt). Unfortunately, there is no magic ratio of debt to equity to use as guidance to achieve real-world optimal capital structure. What defines a healthy blend of debt and equity varies depending on the industry the company operates in, its stage of development, and can vary over time due to external changes in interest rates and regulatory environment.

What Measures Do Analysts and Investors Use to Evaluate Capital Structure?

In addition to the weighted average cost of capital (WACC), several metrics can be used to estimate the suitability of a company's capital structure. Leverage ratios are one group of metrics that are used, such as the debt-to-equity (D/E) ratio or debt ratio.

Capital structure is the specific mix of debt and equity that a company uses to finance its operations and growth. Debt consists of borrowed money that must be repaid, often with interest, while equity represents ownership stakes in the company. The debt-to-equity (D/E) ratio is a commonly used measure of a company's capital structure and can provide insight into its level of risk. A company with a high proportion of debt in its capital structure may be considered riskier for investors, but may also have greater potential for growth.

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17.1 The Concept of Capital Structure

By the end of this section, you will be able to:

• Distinguish between the two major sources of capital appearing on a balance sheet.
• Explain why there is a cost of capital.
• Calculate the weights in a company’s capital structure.

The Basic Balance Sheet

In order to produce and sell its products or services, a company needs assets. If a firm will produce shirts, for example, it will need equipment such as sewing machines, cutting boards, irons, and a building in which to store its equipment. The company will also need some raw materials such as fabric, buttons, and thread. These items the company needs to conduct its operations are assets . They appear on the left-hand side of the balance sheet.

The company has to pay for these assets. The sources of the money the company uses to pay for these assets appear on the right-hand side of the balance sheet. The company’s sources of financing represent its capital . There are two broad types of capital: debt (or borrowing) and equity (or ownership).

Figure 17.2 is a representation of a basic balance sheet. Remember that the two sides of the balance sheet must be Assets = Liabilities  +   Equity Assets = Liabilities  +   Equity . Companies typically finance their assets through equity (selling ownership shares to stockholders) and debt (borrowing money from lenders). The debt that a firm uses is often referred to as financial leverage . The relative proportions of debt and equity that a firm uses in financing its assets is referred to as its capital structure .

Attracting Capital

When a company raises money from investors, those investors forgo the opportunity to invest that money elsewhere. In economics terms, there is an opportunity cost to those who buy a company’s bonds or stock.

Suppose, for example, that you have $5,000, and you purchase Tesla stock. You could have purchased Apple stock or Disney stock instead. There were many other options, but once you chose Tesla stock, you no longer had the money available for the other options. You would only purchase Tesla stock if you thought that you would receive a return as large as you would have for the same level of risk on the other investments.

From Tesla’s perspective, this means that the company can only attract your capital if it offers an expected return high enough for you to choose it as the company that will use your money. Providing a return equal to what potential investors could expect to earn elsewhere for a similar risk is the cost a company bears in exchange for obtaining funds from investors. Just as a firm must consider the costs of electricity, raw materials, and wages when it calculates the costs of doing business, it must also consider the cost of attracting capital so that it can purchase its assets.

Weights in the Capital Structure

Most companies have multiple sources of capital. The firm’s overall cost of capital is a weighted average of its debt and equity costs of capital. The average of a firm’s debt and equity costs of capital, weighted by the fractions of the firm’s value that correspond to debt and equity, is known as the weighted average cost of capital (WACC) .

The weights in the WACC are the proportions of debt and equity used in the firm’s capital structure. If, for example, a company is financed 25% by debt and 75% by equity, the weights in the WACC would be 25% on the debt cost of capital and 75% on the equity cost of capital. The balance sheet of the company would look like Figure 17.3 .

These weights can be derived from the right-hand side of a market-value-based balance sheet. Recall that accounting-based book values listed on traditional financial statements reflect historical costs. The market-value balance sheet is similar to the accounting balance sheet, but all values are current market values.

Just as the accounting balance sheet must balance, the market-value balance sheet must balance:

This equation reminds us that the values of a company’s debt and equity flow from the market value of the company’s assets.

Let’s look at an example of how a company would calculate the weights in its capital structure. Bluebonnet Industries has debt with a book (face) value of $5 million and equity with a book value of $3 million. Bluebonnet’s debt is trading at 97% of its face value. It has one million shares of stock, which are trading for $15 per share.

First, the market values of the company’s debt and equity must be determined. Bluebonnet’s debt is trading at a discount; its market value is 0.97 × $ 5,000,000 = $ 4,850,000 0.97 × $ 5,000,000 = $ 4,850,000 . The market value of Bluebonnet’s equity equals Number of Shares   ×   Price per Share   =   1,000,000   ×   $ 15   =   $ 15,000,000 Number of Shares   ×   Price per Share   =   1,000,000   ×   $ 15   =   $ 15,000,000 . Thus, the total market value of the company’s capital is $ 4,850,000   +   $ 15,000,000   =   $ 19,850,000 $ 4,850,000   +   $ 15,000,000   =   $ 19,850,000 . The weight of debt in Bluebonnet’s capital structure is $ 4 , 850 , 000 $ 19 , 850 , 000 = 24.4% $ 4 , 850 , 000 $ 19 , 850 , 000 = 24.4% . The weight of equity in its capital structure is $ 15 , 000 , 000 $ 19 , 850 , 000 = 75.6% $ 15 , 000 , 000 $ 19 , 850 , 000 = 75.6% .

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Capital structure

Jul 04, 2012

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Capital structure . Issues: What is capital structure? Why is it important? What are the sources of capital available to a company? What is business risk and financial risk? What are the relative costs of debt and equity? What are the main theories of capital structure?

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Presentation Transcript

Capital structure Issues: • What is capital structure? • Why is it important? • What are the sources of capital available to a company? • What is business risk and financial risk? • What are the relative costs of debt and equity? • What are the main theories of capital structure? • Is there an optimal capital structure?

What is “Capital Structure”? • Definition The capital structure of a firm is the mix of different securities issued by the firm to finance its operations. Securities • Bonds, bank loans • Ordinary shares (common stock), Preferenceshares (preferred stock) • Hybrids, eg warrants, convertible bonds

What is “Capital Structure”? Balance Sheet Current Current AssetsLiabilities Debt FixedPreference Assets shares Ordinary shares Financial Structure

What is “Capital Structure”? Balance Sheet Current Current AssetsLiabilities Debt FixedPreference Assets shares Ordinary shares Capital Structure

Sources of capital • Ordinary shares (common stock) • Preference shares (preferred stock) • Hybrid securities • Warrants • Convertible bonds • Loan capital • Bank loans • Corporate bonds

Ordinary shares (common stock) • Risk finance • Dividends are only paid if profits are made and only after other claimants have been paid e.g. lenders and preference shareholders • A high rate of return is required • Provide voting rights – the power to hire and fire directors • No tax benefit, unlike borrowing

Preference shares (preferred stock) • Lower risk than ordinary shares – and a lower dividend • Fixed dividend - payment before ordinary shareholders and in a liquidation situation • No voting rights - unless dividend payments are in arrears • Cumulative - dividends accrue in the event that the issuer does not make timely dividend payments • Participating- an extra dividend is possible • Redeemable- company may buy back at a fixed future date

Loan capital • Financial instruments that pay a certain rate of interest until the maturity date of the loan and then return the principal (capital sum borrowed) • Bank loans or corporate bonds • Interest on debt is allowed against tax

Seniority of debt • Seniority indicates preference in position over other lenders. • Some debt is subordinated. • In the event of default, holders of subordinated debt must give preference to other specified creditors who are paid first.

Security • Security is a form of attachment to the borrowing firm’s assets. • It provides that the assets can be sold in event of default to satisfy the debt for which the security is given.

Indenture • A written agreement between the corporate debt issuer and the lender. • Sets forth the terms of the loan: • Maturity • Interest rate • Protective covenants • e.g. financial reports, restriction on further loan issues, restriction on disposal of assets and level of dividends

Warrants • A warrant is a certificate entitling the holder to buy a specific amount of shares at a specific price (the exercise price) for a given period. • If the price of the share rises above the warrant's exercise price, then the investor can buy the security at the warrant's exercise price and resell it for a profit. • Otherwise, the warrant will simply expire or remain unused.

Convertible bonds • A convertible bond is a bond that gives the holder the right to "convert" or exchange the par amount of the bond for ordinary shares of the issuer at some fixed ratio during a particular period. • As bonds, they provide a coupon payment and are legally debt securities, which rank prior to equity securities in a default situation. • Their value, like all bonds, depends on the level of prevailing interest rates and the credit quality of the issuer. • Their conversion feature also gives them features of equity securities.

The Cost of Capital Expected Return Risk premium Risk-free rate Time value of money ______________________________________________________________ Risk Treasury Corporate Preference Hybrid Ordinary Bonds Bonds Shares Securities Shares

Debt/(Debt+Market Value of Equity) Debt/Total Book Value of Assets Interest coverage: EBITDA/Interest Measuring capital structure

Selected leverage data for US corporations

The capital structures we observe are determined both by deliberate choices and by chance events Safeway’s high leverage came from an LBO HP’s low leverage is the HP way Disney’s low leverage reflects past good performance GM’s high leverage reflects the opposite Interpreting capitalstructures

Capital structures can be changed Leverage is reduced by Cutting dividends or issuing stock Reducing costs, especially fixed costs Leverage increased by Stock repurchases, special dividends, generous wages Using debt rather than retained earnings Interpreting capitalstructures

Business risk and Financial risk • Firms have business risk generated by what they do • But firms adopt additional financial risk when they finance with debt

Risk and the Income Statement Sales Operating –Variable costs Leverage –Fixed costs EBIT –Interest expense Financial Earnings before taxes Leverage –Taxes Net Income EPS = Net Income No. of Shares

Business Risk • The basic risk inherent in the operations of a firm is called business risk • Business risk can be viewed as the variability of a firm’s Earnings Before Interest and Taxes (EBIT)

Financial Risk • Debt causes financial risk because it imposes a fixed cost in the form of interest payments. • The use of debt financing is referred to as financial leverage. • Financial leverage increases risk by increasing the variability of a firm’s return on equity or the variability of its earnings per share.

Financial Risk vs.Business Risk • There is a trade-off between financial risk and business risk. • A firm with high financial risk is using a fixed cost sourceof financing. This increases the level of EBIT a firm needs just to break even. • A firm will generally try to avoid financial risk - a high level of EBIT to break even - if its EBIT is very uncertain (due to high business risk).

Why should we care about capital structure? • By altering capital structure firms have the opportunity to change their cost of capital and – therefore – the market value of the firm

What is an optimal capital structure? • An optimalcapital structure is one that minimizes the firm’s cost of capital and thus maximizes firm value • Cost of Capital: • Each source of financing has a different cost • The WACC is the “Weighted Average Cost of Capital” • Capital structure affects the WACC

Capital Structure Theory • Basic question • Is it possible for firms to create value by altering their capital structure? • Major theories • Modigliani and Miller theory • Trade-off Theory • Signaling Theory

Modigliani and Miller (MM) • Basic theory: Modigliani and Miller (MM) in 1958 and 1963 • Old - so why do we still study them? • Before MM, no way to analyze debt financing • First to study capital structure and WACC together • Won the Nobel prize in 1990

Modigliani and Miller (MM) • Most influential papers ever published in finance • Very restrictive assumptions • First “no arbitrage” proof in finance • Basis for other theories

A Basic Capital Structure Theory • Debt versus Equity • A firm’s cost of debt is always less than its cost of equity • debt has seniority over equity • debt has a fixed return • the interest paid on debt is tax-deductible. • It may appear a firm should use as much debt and as little equity as possible due to the cost difference, but this ignores the potential problems associated with debt.

A Basic Capital Structure Theory • There is a trade-off between the benefits of using debt and the costs of using debt. • The use of debt creates a tax shield benefit from the interest on debt. • The costs of using debt, besides the obvious interest cost, are the additional financial distress costs and agency costs arising from the use of debt financing.

Summary • A firm’s capital structure is the proportion of a firm’s long-term funding provided by long-term debt and equity. • Capital structure influences a firm’s cost of capital through the tax advantage to debt financing and the effect of capital structure on firm risk. • Because of the tradeoff between the tax advantage to debt financing and risk, each firm has an optimal capital structure that minimizes the WACC and maximises firm value.

Is there magic in financial leverage? • … can a company increase its value simply by altering its capital structure? • …yes and no • …we will see….

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Best PowerPoint Templates to Optimize Your Company's Capital Structure and Maximize Its Profitability

Nidhi Malhotra

“It doesn’t matter whether a company is big or small. Capital structure matters. It always has and always will.” - Michael Milken

A company’s capital structure — primarily, its mixture of equity and debt financing —is a substantial factor in valuing the business. The relative levels of equity and debt have effects on risk and cash flow. In turn, it affects the amount that an investor would be willing to pay for the company or an interest in it. Capital structure can have a severe impact on the return a company earns for its shareholders. It also determines if a firm can survive a recession or depression.

The financial manager should choose a capital structure for the firm that maximizes wealth for the company’s stakeholders as a whole. In order to do that, it is crucial to find the ideal mix of debt and equity. This takes us to another significant concept,  Optimal Capital Structure , which is the mix of debt and equity that maximizes a firm’s return on capital, thereby maximizing its value.

In this blog, we will provide you with our top picks of financial management templates that you can use to optimize your firm’s capital structure. These templates result from extensive research and aim to assist you in making financial strategies that can maximize your company’s profit and corporate value.

But before that, let us dive into the basics of capital structure.

An Introduction to Capital Structure

In simple words, the term capital structure refers to the money deployed by the company for its operations and financing its assets. Usually, it is in two forms, i.e., debt and equity capital. Equity capital is raised from ownership shares in a company and claims to its future cash flows and profits. Equity may also come in the form of common stock, preferred stock, or retained earnings. Debt capital in the company’s capital structure refers to the borrowed money that is at work in the business. It’s raised in the form of bond issues or loans. Additionally, short-term debt is also considered to be part of the capital structure. Capital structure is demonstrated as a debt-to-equity or debt-to-capital ratio. A ratio higher than 1.0 signifies that the company is financed more by debt than equity.

In a simple capital structure example, if a firm’s assets come from a $30 million equity issuance and lending that amounts to $70 million, the capital structure can be said to be 30% equity and 70% debt.

Optimal Capital Structure

The basic question is, what is the appropriate or optimum capital structure that a company should follow to achieve the highest profitability? The answer is the proportion of debt and equity that results in the lowest cost to obtain it. This ideal proportion of debt and equity refers to the optimal capital structure. It is the best combination of debt and equity that results in the firm's lowest weighted average cost of capital (WACC). The determination of the optimal capital structure aims to increase the shareholders’ wealth, by maximizing the profit and corporate value. For optimizing the structure, a firm can issue either more debt or equity. The firm may use this newly acquired capital to invest in new assets or to repurchase debt/equity that’s currently outstanding, as a form of recapitalization.

Ready to Use PowerPoint Templates to Download and Incorporate

Here are our hand-picked templates that will help optimize your company's capital structure. These PPT templates are ready-to-use, eliminating all the hassle of creating anything from scratch. Easily modify the slides with the required details, and you are good to go!

Taking advantage of this slide, you can showcase the sources of your company's capital structure funding. You can modify the provided table with details of sources of funding and amount. Additionally, you can highlight the share of funding sources in the pre-designed pie chart. Lastly, you can jot down the significant insights taken from the projected data.

Download Source of Capital Structure Funding Template

This PowerPoint template will aid you in capturing a financial analysis of your company's capital structure. It presents details of the company's capital structure showing the compositions of the company's financial performance. The financial performance is showcased in terms of levered beta, asset to equity ratio, asset to debt ratio, equity to debt ratio, WACC, percentage of the cost of ownership, and cost of debt.

Download Financial Analysis of the Company’s Capital Structure PPT

The below-displayed PowerPoint template is a helpful tool to analyze the debt-equity ratio. This slide highlights the relative proportion of shareholder's equity and debt used to finance a firm's assets. You can easily modify the provided table with your company's debt and equity capital details. Also, you can jot down the key points related to the slide in the note section for readers' further assistance.

Download Analyzing Debt Equity Ratio PPT Slide

This slide will assist you in capturing the present situation of your company's debt situation. You can provide the debt structure of your company by adding the various debts in the particulars section. Further, you can add the amount of debt for two consecutive years. This slide will also be helpful to compare the current debt situation of the company with the last year. Which, in turn, will be valuable to gather insights into your business performance .

Download Present Debt Situation of Company PowerPoint Template

Analyzing the current equity situation of your company will become easy with this PPT slide. Similar to the previous slide, you can highlight the equity structure of your company in this template for two consecutive years. By doing so, you can compare your company's previous year's equity structure to that of the current year.

Download Current Equity Situation of Firm Slide

Financial leverage denotes the reliability of a business on its debts to run its operations. Calculating the financial leverage is essential to determine a business's financial solvency and its dependency upon its borrowings. The below-showcased PPT slide will arm you in calculating the financial leverage of your company. You can mention the details for earnings before interest and tax, profit before tax for the period of five years. Further, you can jot down the ratio of the company's financial leverage. Additionally, use the finely-crafted graph to project the financial leverage of various years. Also, you can highlight keynotes of the projected data in the next section of this PPT slide.

Download Analyzing Financial Leverage of Firm PPT Slide

This slide is a nifty tool to determine the pattern of the cost of equity vs. debt. Incorporating this template, on one side, you can highlight the cost of equity, and on another part, you can showcase details for the cost of debt. Lastly, you can mention the inferences about the patterns of the cost of equity vs. debt in the next section. For instance, the sample data provided in this slide represents that the firm is experiencing a decrease in the cost of equity as the firm's value is decreasing.

Download Cost of Equity vs Debt PPT Template

The template provides sample data for an over-leveraged firm looking to shift to an optimal debt ratio with a minimum cost of capital. This PPT slide summarizes the costs of debt, equity, projected firm value, stock prices, etc. values on different debt ratios. Taking the assistance of this template, you can modify the values with your company-specific statistics for estimating the optimal debt ratio.

Download Estimating Optimal Debt Ratio Template

This PPT slide is resourceful in providing readers with the various options through which a firm can achieve an optimal financial mix. The multiple options to alter the financial mix covered in this side are, Equity Recapitalization, Divestiture & use of Proceeds, and New Investment Financing. The stylish and modern layout of this slide makes it visually appealing.

Download Ways to Alter Financial Mix PowerPoint Template

Template 10

An initial public offering (IPO) represents the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance enables the company to acquire capital from public investors. This PPT template gives information about the IPO process that the company can use to raise funding through equity. Incorporating this slide, you can take reference and further modify the text values to set the IPO process for your company.

Download Initial Public Offering Process Template

Template 11

The following slide showcases details about the leveraged buyout process to raise equity funding. It is how a company can reduce its outstanding debt and significantly increase equity returns. This bar graph covered in this PPT template signifies the use of debt in a leveraged buyout transaction. In addition to that, it showcases how this process significantly increases the equity returns.

Download Leveraged Buyout Process to Raise Equity Funding PPT

Template 12

The slide is useful to determine the relation between net debt and asset trends. The data covered in this template showcases that the netblock is increasing whereas the debt is decreasing. Therefore, the new assets added to the system are being financed through equity and internal financing. Downloading upon this slide, you can easily modify the graph and key results section to cater to your requirements.

Download Impact on Debt PPT Template

Template 13

The below-displayed PPT template captures the equity distribution of a company and analyzes the value of equity issued to equity subscribed for a year. It determines the entire shares which are published and subscribed. Further, it covers the critical points taken that are deduced from the showcased data.

Download Impact on Firm Equity Pattern Template

Template 14

In the previous slides, we have explained how the company has taken initiatives to optimize its capital structure. This slide showcases the achievement of the optimal debt equity mix in the company. It covers a pre-developed table with five columns. It covers Debt-Equity Mix, Cost of Debt %, Cost of Debt %, and Composite cost of Capital % for four quarters. The sample data covered in this slide determines how the firm will gradually reach the optimal financial mix of debt and equity to incur a minimum cost of capital in the next year. The firm will have the lowest cost of capital with 19% debt and 81% equity.

Download Achieving Optimal Debt Equity Mix Slide

Template 15

This slide aims to analyze the firm's financial performance with the help of a balance sheet statement. This template provides a glimpse of the firm's balance sheet with information about assets, liabilities, and shareholder's equity for the current year. Companies can also make use of this pre-developed accounting tool to ease their work and, in turn, smoothen the work processes of their company.

Download Balance Sheet Statement PPT Template

In Conclusion

Needless to say, that the companies that have survived all times focus on the highest or maximum profits. Meanwhile, if the companies are not profit-oriented, they get crushed by the better efficient companies. Download this deck to help your organization optimize debt ratio to maximize firm value and reduce the cost of capital. These PPT templates will also be handy for the chief financial officer to analyze and present the company's financial performance to higher-level management.

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Q1 marked by solid cash generation and Top-End model changeovers

1st Quarter Results 2024.

April 30, 2024 – Mercedes-Benz Group AG reported Free Cash Flow from the industrial business at a solid €2.23 billion (Q1 2023: €2.16 billion) in the first quarter with strong cash conversion including positive working capital developments.

You will find all documents and the recordings of the conference calls in the lower section of this page.

Group Earnings Before Interest and Taxes (EBIT) totalled €3.9 billion (Q1 2023: €5.5 billion), reflecting lower raw material prices, tight cost control and a strong performance at Mercedes-Benz Vans. These effects partially offset lower sales at Mercedes-Benz Cars where supplier bottlenecks and model changeovers in the Top-End segment also led to a less favourable model mix. Group revenue came in at €35.9 billion (Q1 2023: €37.5 billion).

Mercedes-Benz delivered a solid Free Cash Flow in the first quarter thanks to our disciplined go-to-market approach, our desirable products and despite the volatile economic environment and external challenges. While we remain vigilant about the global macroeconomic and geopolitical outlook, we confirm our full-year financial targets for 2024. Harald Wilhelm Member of the Board of Management of Mercedes-Benz Group AG. Finance & Controlling/Mercedes-Benz Mobility

Investments, Free Cash Flow, Net Liquidity

The Free Cash Flow from the Industrial Business in the first quarter reached €2.23 billion (Q1 2023: €2.16 billion), supported by an adjusted Cash Conversion rate of 1.0 at Mercedes-Benz Cars. The Net Liquidity from the Industrial Business rose by 6% to a strong and very comfortable level of €33.6 billion (end of 2023: €31.7 billion). This included a share buyback of approximately €300 million in the first quarter. The Group’s investments in property, plant and equipment in the first quarter totalled €0.7 billion (Q1 2023: €0.8 billion). Research and development expenditure fell to €2.2 billion (Q1 2023: €2.5 billion).

Divisional results

Mercedes-benz cars.

Earnings Before Interest and Taxes at Mercedes-Benz Cars reached €2.5 billion (Q1 2023: €4.1 billion) and resulted in an adjusted Return on Sales of 9.0% (Q1 2023: 14.8%) mainly due to a temporary decline in volumes and model transitions in the Top-End segment as well as higher lifecycle management costs to keep products at the cutting edge. Top-End vehicles were constrained by model changeovers of the G-Class as well as the Mercedes-AMG derivatives of the E-Class and GLC, as well as supply-chain bottlenecks. Mercedes-Benz Cars sales reached 463,000 units (-8%) in the first quarter, with solid results in all regions except Asia. Despite a decline in S-Class sales, it remains the undisputed leader in all key regions.

Overall, pricing remained at a high level in Q1. Sales are expected to increase in the coming quarters with the Top-End vehicle mix expected to improve in the second half of the year. The EV adoption rate has slowed across the industry. In the transition from ICE to BEV vehicles, Mercedes-Benz plug-in hybrids are expected to play an important role. In Q1 Mercedes-Benz initiated BEAT26, an efficiency program to lower material costs in procurement, in close collaboration with its suppliers.

Mercedes-Benz Vans

Mercedes-Benz Vans posted a strong start into the year with healthy net pricing supported by strong product substance leading to very good financial results. The adjusted Return on Sales for Mercedes-Benz Vans rose to 16.3% (Q1 2023: 15.6%) thanks to increased global sales (+7%) driven by positive product structure, especially from commercial Vans (+11%). Regionally, the important markets China (+27%) and the United States (+15%) contributed to the strong Q1 sales. Revenue increased by 6% to €4.9 billion (Q1 2023: €4.6 billion) in the first quarter and the Earnings Before Interest and Taxes increased by 22% to €933 million (Q1 2023: €762 million). BEV sales declined but are expected to rise with the full availability of the newly launched facelifts of the EQV, eVito and the new eSprinter.

Mercedes-Benz Mobility

Compared to the first quarter of the previous year, Mercedes-Benz Mobility almost doubled its new business volume for BEVs to €2.0 billion (Q1 2023: €1.2 billion). Overall, at the end of March 2024, the contract volume amounted to €134.7 billion and is thus at the same level as year-end 2023 (FY 2023: €135.0 billion). At €14.8 billion, the new business of Mercedes-Benz Mobility is also on prior-year level (Q1 2023: €14.7 billion). The adjusted EBIT decreased to €279 million mainly due to a lower interest margin and higher cost of credit risk (Q1 2023: €539 million). As a result, the adjusted return on equity (RoE) decreased to 8.5% (Q1 2023: 15.6%).

• Mercedes-Benz Group Interim Report Q1 2024 PDF (1.57 MB) - Apr 30, 2024
• Mercedes-Benz Factsheet Q1 2024 PDF (0.54 MB) - Apr 30, 2024
• Equity Roadshow Presentation Q1 2024 PDF (18.87 MB) - Apr 30, 2024
• Fixed Income Presentation Q1 2024 PDF (17.17 MB) - Apr 30, 2024
• Mercedes-Benz Factsheet Q1 2024 XLSX (0.19 MB) - Apr 30, 2024
• Capital Market Presentation Q1 2024 PDF (6.20 MB) - Apr 30, 2024

Outlook on the further business development of the Mercedes-Benz Group.

Share buyback execution update

On 21 February 2024, Mercedes-Benz Group AG resolved to implement a share buyback policy. Based on this policy, the future Free Cash Flow from the Industrial Business (as available post potential smallscale M&A) generated beyond the approximately 40% dividend payout ratio of Group Net Income shall be used to fund share buybacks with the purpose of redeeming shares. As part of a buyback programme announced in February 2023, Mercedes-Benz Group AG intends to acquire own shares worth up to €4 billion (not including incidental costs) on the stock exchange and to then cancel them. Repurchases for this programme are well on track. A further €3 billion share buyback programme, announced in February 2024, is now scheduled to begin in May 2024 and then run in parallel with the buyback program announced in February 2023. Both buyback programs are expected to be completed in the first quarter of 2025. By the third quarter 2024, buybacks are expected to have reached a total of €4 billion and to then reach up to €7 billion in Q1 2025 before the Annual General Meeting that year.

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