📖Peter Lynch

Balance Sheet

🌿 Intermediate★★★★★

A clean balance sheet with low debt gives a company the resilience to survive bad times and capitalize on good ones.

💬

Look for a strong balance sheet with low debt.

— *One Up On Wall Street*，1989

🏠 Everyday Analogy

Choosing a company is like choosing a marriage partner—you must assess the solidity of its foundation. The balance sheet is a company's financial inventory. A company with substantial assets and minimal liabilities is like an individual who owns a house and a car without debt: it possesses strong risk resilience and is less likely to collapse when facing difficulties.

📖 Core Interpretation

A healthy balance sheet is the foundation of a company's survival, and low debt implies low risk.
💎 Key Insight：Debt amplifies everything: profits in good times, losses in bad times. Lynch prefers companies with debt-to-equity ratios well below industry averages. A strong balance sheet means the company can weather recessions, fund growth internally, and avoid diluting shareholders. When comparing two similar companies, always pick the one with less debt — it has more options and less risk.

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❓ Why It Matters

Highly leveraged companies are prone to bankruptcy during difficult times, missing out on opportunities for recovery.

🎯 How to Practice

Focus on the debt-to-equity ratio, current ratio, and cash reserves.

🎙️ Master's Voice

There is always something to worry about. Avoid weekend thinking.
Lynch noted that weekends brought anxiety about markets. But worry did not change outcomes; analysis did.

⚔️ Practical Guide

✅ Decision Checklist

  • Am I worrying productively?
  • Is weekend anxiety affecting me?
  • Am I focused on what I can control?

📋 Action Steps

  1. Limit unproductive worry
  2. Focus on analysis, not anxiety
  3. Avoid weekend panic

🚨 Warning Signs

  • Weekend anxiety
  • Unproductive worry
  • Emotional weekends

⚠️ Common Pitfalls

✕Zero debt is not necessarily a good thing.
✕Moderate leverage can enhance returns.
✕Standards vary across industries.

📚 Case Studies

1
Overleveraged Retailer (1990)
Lynch reviews a fast-growing retailer with thin equity and rising debt. Despite strong earnings, the balance sheet shows weak interest coverage and heavy short-term liabilities.
✨ Outcome：Avoided the stock; later the retailer faced liquidity issues and the shares underperformed the market.
2
Conservative Utility (1987)
Analyzing a regional utility, Lynch notes modest growth but strong equity, low leverage, and predictable cash flows, with dividends well covered by earnings.
✨ Outcome：Invested and held; the stock weathered the 1987 crash relatively well and delivered steady returns and dividends.

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