Why does the debt-to-equity ratio vary from industry to industry? - Seedly

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Asked by Anonymous

Asked on 23 Apr 2019

Why does the debt-to-equity ratio vary from industry to industry?

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Sandra Teo
Sandra Teo
Top Contributor

Top Contributor (Apr)

Level 6. Master
Answered on 24 Apr 2019

Hello!

The main reasons include different capital intensity levels between industries and whether the nature of the business makes carrying a high level of debt relatively easier to manage.

Capital-intensive industries, such as oil, gas or telecommunications, require significant financial resources and large amounts of money to produce goods or services.

If a company's performance is not subjected to fluctuation accordingly to the economy, it tends to be able to carry larger amounts of debt at a lower risk. For instance, industries that have a stable demand for their goods and services such as utilities, manufacturing tend to have higher debt-to-equity ratios.

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Ang Yee Gary
Ang Yee Gary, Medicine at National University Of Singapore

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Level 3. Wonderkid
Answered on 24 Apr 2019

As what Prof Damodaran said how much you borrow and in what currency depends on the nature of the business you are in.

If you are a stable business then you can borrow money

If you expect cashflow to be in the future then your debt should be long term

If you are not profitable then there is no reason to borrow money or worse borrow short term debt

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