Debt Equity ratio

[karkisanjay]

why pharmacutical compay choose low debt to equity ratio and banking company choose high debt to equity ratio

[CovKid]

A high debt/equity ratio (high gearing/leverage) creates risk for both debt and equity holders. High debt means high interest payments (fixed charges). If operating profit falls, net profit (after fixed interest payments) will fall sharply. At the worst, the business will not be able to meet the interest payments. Could lead to liquidation. Businesses which face high BUSINESS risk will not wish to magnify that through high gearing/leverage (FINANCIAL risk). Business Risk arises through uncertainty in the product market and high OPERATING risk if there are high fixed costs. That may apply to pharmaceuticals. Banks are VERY different. Most of their funds come from customer deposits--debt. Inevitably they are highly geared. I think D/E ratios are about 10 or 11. Other businesses have D/E ratios which rarely exceed 1 (UK). To understand a banks balance sheet structure (and gearing) you will need to consult a specialist book (e.g. Howell and Bain, Economics of Money Banking and Finance).

Google:" Wiki Debt Equity" for useful info. on D/e in general.