Which type of industry is more likely to exhibit higher financial leverage?

Capital-intensive industries, such as airlines, are more likely to exhibit higher financial leverage due to their significant need for substantial fixed assets and investments. These industries often require large amounts of capital for equipment, infrastructure, and maintenance in order to operate effectively.

Financial leverage refers to the use of borrowed funds to increase the potential return on equity. In capital-intensive industries, companies typically finance a large portion of their operations through debt because the primary assets they require may be too costly to be financed solely through equity. This high level of borrowing can amplify both the potential returns and the risks associated with these investments.

For instance, an airline must invest in expensive aircraft, terminals, and technology, which cannot be easily acquired without substantial financing. Consequently, these companies have a higher debt-to-equity ratio, indicating greater financial leverage. While other industries, like retail and service-oriented businesses, may also use leverage, they tend to rely less on fixed capital and have business models that allow for more operational flexibility, resulting in lower financial leverage overall. Conversely, technology startups may have limited capital needs and often rely on equity financing, leading to lower levels of leverage as well. Thus, the characteristics and operational requirements of capital-intensive industries make them more prone to higher financial leverage.