It can be observed that the average gearing ratio for the Pharmaceuticals industry is much lower...

It can be observed that the average gearing ratio for the Pharmaceuticals industry is much lower than industries such as Utilities and Transportation. Explain why this is the case.

Expert Solution

Average gearing ratio for the Pharmaceuticals industry is much lower than industries such as Utilities and Transportation because pharmaceutical industries are highly cash generating industries and they will also be having lower leverage in comparison to industries like utilities and transportation because usually utilities and transportation industries are mostly highly leveraged company and when there is a high leverage so the gearing ratio would be higher because these transportation and utilities companies are not able to generate their cash quickly, so if they are not able to generate their cash quickly they are not able to repay debt quickly so there would be reflection in overall capital gearing ratio which will be reflected in higher amount than that of pharmaceutical industry.

Pharmaceutical industries are generally considered low leverage business which is based upon continuous cash flows and it is able to repay its debt quickly so there is a low leverage ratio and low gearing ratio as well.

jeff jeffy answered 1 year ago

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