Question

Why does the proportion of net debt in the market-value balance sheet differ across industries?

Answer 1

Different industries typically have different requirement of debt and cash. Net debt is typically Debt lesscash. Different industries have unique features and that shapes their debt requirements. Capital intensive industries need more debt as investment in capex is huge. On the contaray, software companies can be built without burning too much money as so the debt needs are meagre. Debt is also raised by companies considering if they are profitable or not since companies also tend to take advantage from tax benefit of interest payments on debt. Cash rich companies may also end up having low net debt even when they have raised a huge amount of debt. Therefore, we can say each industry requirements for debt and cash differs and hence the proportion of net debt varies across industries.