What does a higher percentage of debt financing imply for a business?

A higher percentage of debt financing typically implies higher business risk. When a company relies more on debt to finance its operations and growth, it must make regular interest payments and eventually repay the principal amount borrowed, regardless of its financial performance. This increases the pressure on the business, particularly in times of economic downturn or volatility, where revenue may fluctuate.

Higher debt levels can lead to financial distress if the business is unable to meet its obligations, thus making it riskier for investors and creditors. They may view a company with significant debt as a higher risk because there is a greater chance of default compared to a company that is primarily financed through equity.

Additionally, as the debt level rises, the company may also see fluctuating returns on equity due to the increased financial obligations that threaten profitability. This heightened risk can lead to greater scrutiny from investors and can affect the company's ability to secure more financing in the future.