As the Australian economy continues to rebound and reshape in 2025, the concept of optimal capital structure has taken centre stage for businesses seeking to fuel expansion, weather volatility, and maximise shareholder value. With shifting interest rates, evolving tax rules, and fresh regulatory pressures, finding the right mix between debt and equity financing is more nuanced—and critical—than ever.
What Is Optimal Capital Structure?
At its core, optimal capital structure refers to the blend of debt and equity a company uses to fund operations and growth, in a way that minimises the overall cost of capital while maximising enterprise value. The classic trade-off: debt is cheaper (thanks to tax-deductible interest), but too much can put a business at risk if cash flow tightens. Equity is safer, but dilutes ownership and may cost more in the long run.
For Australian businesses, 2025 brings new dynamics. The Reserve Bank of Australia (RBA) has maintained a cautious approach to rate rises, with the cash rate hovering near 4.35% in early 2025, up from historic lows. Meanwhile, the Federal Government’s recent tweaks to thin capitalisation rules have changed how multinationals and large corporates weigh their debt levels. These shifts mean that what worked in the past may not be optimal today.
Why Capital Structure Matters More in 2025
- Interest Rate Environment: After several years of rate hikes, borrowing costs are higher, making excessive leverage riskier. Many firms are reassessing their debt loads and refinancing strategies to lock in lower rates where possible.
- Tax Law Changes: The 2024 update to thin capitalisation rules means Australian subsidiaries of global firms must now cap interest deductions based on a percentage of earnings, not just asset values. This makes high-debt strategies less attractive for some sectors.
- Regulatory Scrutiny: Both APRA and ASIC have flagged tighter reviews of corporate balance sheets, especially in sectors like property, infrastructure, and resources. Lenders, too, are imposing stricter covenants on new debt facilities.
In this climate, businesses need to be more deliberate than ever when structuring their capital base. The right approach can free up cash for investment, provide a buffer against downturns, and keep shareholders happy.
Key Strategies for Optimising Capital Structure in Australia
1. Dynamic Debt Management
Gone are the days of ‘set and forget’ borrowing. Smart CFOs are:
- Regularly reviewing loan terms and covenants, especially as lenders adjust to macroeconomic uncertainty.
- Balancing fixed and floating rate debt to manage interest rate exposure.
- Exploring alternative sources, such as green bonds or syndicated loans, which may offer more flexible terms in 2025.
2. Equity Raises with Strategic Purpose
With ASX investor sentiment recovering, 2025 has seen a wave of secondary offerings and rights issues. However, the best-performing firms are:
- Timing equity raisings to coincide with growth opportunities or acquisitions, not just to plug holes in the balance sheet.
- Communicating clearly to shareholders how new capital will drive value, not just dilute existing stakes.
3. Sector-Specific Approaches
- Property & Infrastructure: With regulatory pressure on gearing, many REITs are shifting towards lower leverage and longer-term debt to appease lenders and ratings agencies.
- Tech & Startups: Still favouring equity for flexibility, but increasingly using venture debt as a bridge between funding rounds.
- Resources: Mining giants are using surplus cash from high commodity prices to pay down debt, improving credit ratings and future borrowing capacity.
Real-World Example: Woolworths Group
In 2025, Woolworths Group undertook a strategic review of its balance sheet in the wake of regulatory changes and rising rates. By refinancing a portion of its debt at fixed rates and issuing a $500 million green bond, the retailer managed to lower its average cost of capital while supporting sustainability commitments. The result: improved investor confidence, a stronger credit rating, and a war chest for future expansion.
How to Assess Your Own Optimal Mix
No two businesses are the same, but the following steps can help guide your capital structure review:
- Analyse Current Leverage: Compare your debt/equity ratios to industry peers and benchmark against lender covenants.
- Model Different Scenarios: Use financial modelling to stress-test your ability to service debt under various revenue and interest rate scenarios.
- Consider Growth Plans: Firms with aggressive expansion plans may favour more equity, while mature businesses might optimise through moderate leverage.
- Factor in Regulatory and Tax Changes: Stay up-to-date with 2025’s policy landscape to avoid costly surprises.
Conclusion: The Road to Resilience
The pursuit of optimal capital structure isn’t just about numbers—it’s about building resilience, agility, and value in an unpredictable world. Australian businesses that proactively revisit their capital strategies in light of 2025’s new realities will be best positioned to thrive, not just survive.
