CORPORATE DEBT

“My father was an amazing businessman and I think this was due to the fact that he always had some money on the side and was therefore able to use his best judgement under the circumstances, instead of being forced into a decision by financial pressure. Having a surplus is the greatest aid to business judgement that I know.” Harvey S. Firestone

“Always have enough cash to weather the good and bad times. That’s one of the most important points—always have enough cash.” Tom Murphy

‘“There were a lot of lessons learned across all sectors during the GFC about the behaviour and performance of different companies. One of the lessons was that some very good businesses can struggle when they don't have time to trade through cycles, and leverage can be a catalyst for short-term outcomes that they can't trade through.” Leigh Harrison, Macquarie Bank

“There is, however, one common practice the old companies share: a conservative approach to managing finances. These firms are very reluctant to go into debt as a way of funding their business.” Vicki Tenhaken, ‘Lessons from the Century Club Companies’

‘‘Financial theory says that leaders who hoard cash in their companies are irresponsible in their deployment of capital. In a stable, predictable, and safe world, the theory might hold; but the world is not stable, predictable, or safe. And it never will be.’ Jim Collins

“Really good businesses usually don't need to borrow.” Warren Buffett

“A company should own twice as much as it owes. This philosophy has helped me avoid companies that owe too much to survive.” Chris Browne

"What you want to see on a balance sheet is at least twice as much equity as debt, and the more equity and the less debt the better." Peter Lynch

“Never borrow short term against long term debt, and beware of stock companies that do.” Leon Levy

“The most important question to ask about a cyclical is whether the company’s balance sheet is strong enough to survive the next downturn.” Peter Lynch

“Make sure financial leverage is appropriate for the cyclicality of the business.” Jeff Ubben

“In addition to magnifying losses as well as gains, leverage carries an extra risk on the downside that isn’t offset by accompanying upside: the risk of ruin.” Howard Marks

“In bad times cyclical companies with heavy debt loads may well face insurmountable problems.” Chris Browne

"The floor for any business is different. If a company is highly levered, the floor could be zero." Mohnish Pabrai

“Corporate health provides a much better margin of safety than good current earnings. We would rather invest in a company with a solid balance sheet, strong working capital, and little leverage than in a company with a lot of debt but strong earnings at present.” Thomas Khan

"I turn down many otherwise down attractive investments because of their weak balance sheets, and I believe that this discipline is a material reason for our success over the years." Ed Wachenheim

“First [criteria] is the balance sheet itself. We are only looking at companies that have met our very stringent criteria for very high quality financial statements. We are looking at companies that have very little debt, lots of capital on their balance sheets, and are in most cases very highly rated by the ratings services or by any analyst who would be doing an analysis of the business.” David Polen

“Our best bear protection is buying companies with strong balance sheets, low debt, real earnings and powerful franchises. These companies can survive bad times and eventually become more dominant as weaker competitors are forced to cut back or shut down.” Chris Davis

“Our long-standing philosophy has always been that excess financial leverage was not a good bedfellow with value investing.” Richard Pzena

"I insist on financial strength." Ralph Wanger

“I learned this very early, it is very hard to go bankrupt if you don’t have any debt.” Peter Lynch

“Whether it is a company running up debt to pay for expenses, or a person borrowing to buy stocks on margin, the borrower is giving someone else the right to say when the game is over.” Chris Browne

"The biggest losses in stocks come from companies with poor balance sheets." Peter Lynch

“The coup de grace for many corporations is debt, of course.” Nick Train

“The year 1974 taught me that leverage can decimate even the best company when its access to capital is cut off. It also taught me that most people have short memories. That’s why most financial people have five-year careers – one market cycle.” Michael Milken

"Unjustifiably high financial leverage has been the cause of more investment failures than any other variable." Frank Martin

“We just keep focusing on ideas [for shorts] where the business is deteriorating and the debt is monstrous.” Jim Chanos

"Debt is an amplifier and an accelerant. When times are good, sales ticking higher, margins expanding and cash flows strong, only the advantages of leverage are visible - higher returns on equity, faster growth rates and an enhanced benefit to stock holders as debt is repaid. When conditions change, very quickly (and, more often than not, very unexpectedly) debt, hitherto unnoticed, takes centre stage. Those who comfortably applauded the results of the leverage in the good times then find themselves caught in a negative spiral as the process reverses." Marathon Asset Management

"It has been our experience that excessive debt (almost always taken on during periods of optimism) is the single most common cause of permanent capital loss for investors." Zeke Ashton

"Balance sheets don't really matter until the day they do. Then they're all that matters." Whitney George

"The balance sheet is much more important than the income statement." Jim Rogers

“The really good businesses have very strong balance sheets, where the majority of their capital is the owners’ capital and not debt capital.” Chuck Akre

“On occasion in the past, we have been behind bad balance sheets. Fooling ourselves that everything that needed to go right would go right, we usually wished we hadn’t placed our capital in such a predicament.” Christopher Bloomstran

"The balance sheet is the barrier to the long term arbitrage. We want to have our investment right even if we have our timing wrong." Chuck Royce

"We want protection against risk, so are attracted to strong balance sheets. It's much easier to analyse a balance sheet than it is management, so we start by getting a good handle on the financial strength of the company. If you've looked at tens of thousands of balance sheets, as I have, you know what to look for in each case. Generally, though, we look at debt-to-equity ratios, liquidity, depreciation rates, accounting practices, pension and healthcare liabilities, and "hidden" assets and liabilities. The overriding question is, if something goes wrong, what's our protection?" Ed Wachenheim

“We are looking for companies that have pristine balance sheets, the best balance sheets that you can find, an abundance of cash with little if any debt whatsoever.” Dan Davidowitz

“First of all, balance sheet matters. You need to eliminate weaker companies first.” Rajiv Jain

"If you are dependent on borrowed money, you have to wake up every day and worry about what the world thinks of you." Warren Buffett

“One of my basic tenets is never to invest in a business which requires leverage or borrowing to make an adequate return on equity.” Terry Smith

"The first and most toxic reason that stocks become cheap is too much debt." Chris Browne

"Staying away from excessive leverage cures a lot of ills." Thomas Gayner

"I like to look at the balance sheet and I don’t like debt because it can really get a company into trouble. I prefer to buy basic businesses with strong balance sheets." Walter Schloss

"When a stock market decline coincides with a fairly sizeable economic slump as happened in 1937-38 or 1957-58, most stocks sell off from 35 to 50 percent. The better ones then recover when the slump ends and usually go on to new high levels. Even in the greatest slump of all time, only a small percentage of all companies failed, that is went down 100%. Most of these were companies which had fantastic amounts of debts and senior securities placed ahead of their common." Phil Fisher

"If I find fault with a company's balance sheet, especially with the level of debt relative to the assets or cash flows, I will abort our analysis, unless there is a compelling reason to do otherwise." Ed Wachenheim

"Our investment strategy is premised on purchasing long equity securities of companies with low levels of debt on the investee company’s balance sheet." Jeffrey Ubben

"The obvious consequence of owning a financially leveraged business is that, if you get it wrong, you can put the business in a challenging position. It may not be able to raise capital and because the equity is a relatively small portion of the capitalization, very small movements in the operating performance of that business can have a damaging impact on the equity value." David Samra

"To Marathon's way of thinking, it is not wise to introduce financial leverage into a business that already has a high degree of operating leverage. The two together are a dangerous combination. Even history shows that investors who cheer leverage in the good times often exhibit little fortitude in the bad." Marathon Asset Management

“When considering buying a company with debt, we wanted to avoid combining operating risk (uncertain cash flows) and financial risk (above-average levels of debt).” Eric Cinnamond

“Risk in capital structure should vary inversely with business risk.” Michael Milken

"What constitutes too much of it [debt] is a function of the kind of company you're looking at. A consumer loan company, for example, has to carry a debt load that would be totally inappropriate for a cyclical manufacturing company. If you're the latter with a heavy load of debt, you'll go broke when demand slackens, and that's a very bad idea for shareholders. You read about such failures during every recession. Generally, if the debt of any kind of manufacturing or retail business is more than half of the company's total capitalisation, there's a problem." Ralph Wanger

"I generally tend to avoid companies with stressed balance sheets. I've been through too many cycles where debt kills you." Preston Athey

"As I look at my pre-investment checklist, the number one reason for losses for many great value investors is leverage. Unfortunately, this has been true for Pabrai Funds as well. In the last seventeen years, leverage is front and center on a number of my mistakes. My interest in investing in levered businesses in the future is likely to be very low. And when we do take the plunge, position sizing will be quite conservative." Mohnish Pabrai

"Be really, really, really careful about things that are leveraged." Thomas Gayner

"We don't like a lot of debt and we don't think most value investors care for it either." Walter Schloss

“Remember, winning in the investment game means not losing. A strong balance sheet is a good indicator of a company’s stamina, its ability to survive when the going gets tough.” Chris Brown

"I almost always start my analysis of a company by studying its balance sheet. It is said the shareholder makes money off the income statement, but survives off the balance sheet, I agree." Ed Wachenheim

"It is important to understand that the prices of solid companies with strong balance sheets and earnings usually recover [in market sell-offs]. In my experience, if the fundamentals are sound, they always have and always will." Chris Browne

"If the investment is a well-run company with sufficient financial strength, even the greatest bear market will not erase the value of holding." Phil Fisher

“Companies that are overlevered can experience large changes in their equity valuations with only the slightest change to owner earnings. Investors who look at a stock without incorporating the complete capitalization picture can miss a key component, because equity values are contingent, while debt is forever.” Todd Combs

"Companies that went bankrupt [in the Financial Crisis] all had faced a common pitfall: too much debt. The companies that withstand crises are most often the ones with solid balance sheets and with leadership that is prudent, trustworthy and devoted. Isn’t this perfectly logical?" Francois Rochon

"The four letter word that messes up households, governments, and companies is 'debt'. If you can stay away from debt you will be much better off. Of course, there are some situations where it makes sense to take on a reasonable level of debt. For example, a fixed rate mortgage that costs no more than 25% of your income, to buy your first house makes sense. But many of the financial problems in the world have been due to entities taking on way too much debt. The companies that we own, have very manageable debt, if any. I always look closely at the interest costs on the debt related to EBITDA. Our companies must have at least 4X EBITDA as compared with net interest expense, and most have a far greater cushion than that." Alex Roepers

"I've made so many mistakes over the years that I struggle to isolate just one as the biggest single mistake. Among the choices though I think excessive leverage has been the most personally painful. I did not fully appreciate the degree of leverage that existed in so many aspects of so many businesses and how painful the unwinding of that leverage would prove to be." Thomas Gayner

"More than anything else, it's debt that determines which companies will survive and which will go bankrupt in a crisis. Young companies with heavy debts are always at risk." Peter Lynch

"The big lesson I learned is that the single biggest area of failure in the checklist is leverage." Mohnish Pabrai

"We rarely use much debt and, when we do, we attempt to structure it on a long-term fixed rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet." Warren Buffett

"I do expect the economy to occasionally come under extreme stress - without knowing when that will be. I want the companies I invest in to be set up in such a way to survive such a scenario. An important step in this direction is that they are well capitalised and they have stable competitive advantages such as cost leadership. If you were to build a house in an earthquake zone you certainly would invest in someone who could build you a solid home, not someone who claims to predict when the earthquake is going to hit. I see myself as the builder not the clairvoyant." Robert Vinall

"I've learned that if you're levered, banks are levered, insurance companies are levered, sometimes even a mining company can be levered, you may not get to play out your hand. That's one thing that could happen. You might get taken out completely in the case of serious leverage." Mohnish Pabrai

"In a highly leveraged company, bank debt is dangerous, because if the company runs into problems the bank will ask for its money back. This can turn a manageable situation into a potentially fatal one." Peter Lynch

"Too often, CEOs of profitable companies feel they will always be able to refund maturing obligations, however large these are. In 2008-2009, many managements learned how perilous that mindset can be." Warren Buffett

“Conservative capitalisation benefits strong firms over the long-term. Leverage may marginally improve ROE in good economic times, but it can kill a company in poor economic times.” Brian Bares