It’s perhaps a high level answer but it’s not theoretical, if you are interested in diving deep I would highly recommend Professor Damodaran’s corporate finance

It’s perhaps a high level answer but it’s not theoretical, if you are interested in diving deep I would highly recommend Professor Damodaran’s corporate finance course, he is the gold standard and it’s available for free on YouTube. Without repeating the entire course I’ll try and expand. The critical business metric is free cash flow, all operational data leads to that. We can project the firms free cash flows out over a period of years. Now the question is: how much should we spend to get this stream of cash? It’s not simply less than the sum of the cash flows, because the ones that come later are worth less than the ones that come sooner. To account for this, we “discount” those cash flows at a specific rate, the weighted average cost of capital. This number is where we bring in the mix of debt and equity in the firm and contains the cost of equity financing and the cost of debt financing, which mostly has to do with what interest rate the firm can borrow at. There is an optimal quantity of debt that minimizes this discount factor, thus maximizing the value of the future cash flows, it’s convex. If we can spend less than those summed discounted cash flows, funded with that optimal mix of debt and equity, we are NPV positive. This means we are generating real economic profits with our business activities.