There can be various reasons why one loss-making company may choose to take debt while the other may not. Some possible reasons could be:
Risk tolerance: The company that has taken debt may have a higher risk tolerance and may be willing to take on more debt to finance its operations or expansion plans, whereas the other company may be more conservative and prefer to rely on equity or internal funds.
Cost of debt: The company that has taken debt may have been able to obtain debt at a lower cost than the other company, which may have made it more attractive to take on debt as a means of financing.
Access to capital: The company that has not taken on debt may have had limited access to debt capital due to factors such as creditworthiness, collateral, or lender requirements.
Business strategy: The two companies may have different business strategies, with one company focused on minimizing debt and the other focused on growth or market share.
Companies with lower operational leverage can take on more debt (financial leverage) as their earnings are less affected by fluctuations, while those with higher operational leverage might avoid excessive debt to mitigate heightened risk, explaining divergent debt choices among loss-making firms.
Overall, the decision to take on debt or not is a complex one that depends on various factors such as the company’s financial position, risk tolerance, cost of debt, and business strategy.
