Question

The healthcare sector, on average, uses 30% debt financing in its long-term capital mix. Rank the following industries within the sector in descending order of debt usage. Justify your rankings.

Biotechnology

Facilities (hospitals and nursing homes)

Medical equipment and supplies

Pharmaceuticals

Answer 1

Ans: In health care sector ,on average,uses 30 % debt financing in its long term capital mix i.e the ratio of debt to capital ratio of a healthcare company in the form of Equity to its capital the more Equipment and and machines it need for the firm the higher the ratio will be of capital to debt ratio in the long run and hence the rankings will be as follows

1)Facilities(Hospital and Nursing homes):As these are capital focused investment where 100% amount is invested in long term capital for the building and infrastructure which will be used fir more than twenty years and the debt ratio is quite higher because of the security of the investment so the debt ratio is 30 % or more

2)Biotechnology : As the fir needs to invest a lot in research based capital for a long term and its return is long term based.

3)Pharmaceutical:These are the firms whose main focus is to produce and sale there product because of that there main capital is invested in machinery for production of medicine and equipment and apart from it some part is used in sales and distribution like storage and logistics etc so it comes on number three.

4 Medical equipment and supplies:Its portion of debt to capital is lower as compare to other options in the question as its capital mix is more based on short term as well as medium term capital because of the cycle of the product and in needs a lower percentage of long term capital.