📖Benjamin Graham

Debt Level

🌿 Intermediate★★★★☆

Long-term debt must not exceed working capital to ensure the company can survive economic downturns.

💬

Long-term debt should not exceed working capital.

— _The Intelligent Investor_，1949

🏠 Everyday Analogy

Just as with household financial management, long-term debts such as mortgages should not exceed your savings minus credit card balances. If long-term debt becomes too burdensome, any interruption in income can easily lead to a breakdown in your funding chain.

📖 Core Interpretation

Long-term liabilities should not exceed working capital (current assets minus current liabilities).
💎 Key Insight：This debt criterion ensures a company is not overleveraged relative to its liquid resources. When long-term debt exceeds working capital, even a modest revenue decline can trigger a solvency crisis. Conservative debt levels provide the financial flexibility to weather recessions without diluting shareholders or selling assets under duress.

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❓ Why It Matters

Excessive debt increases financial risk and may lead to bankruptcy during difficult times.

🎯 How to Practice

Calculate the debt-to-equity ratio to identify companies with lower debt levels.

🎙️ Master's Voice

To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.
Graham noted that adequate returns are accessible to all through simple methods. Beating the market consistently is much harder.

⚔️ Practical Guide

✅ Decision Checklist

  • Am I seeking satisfactory or superior results?
  • Is my approach appropriate?
  • Are my expectations realistic?

📋 Action Steps

  1. Choose your level of ambition
  2. Match method to goal
  3. Accept trade-offs

🚨 Warning Signs

  • Unrealistic expectations
  • Wrong methods for goals
  • Overconfidence

⚠️ Common Pitfalls

✕Moderate leverage can enhance returns.
✕but it must be kept within safe limits.

📚 Case Studies

1
WorldCom Hidden Leverage (2001)
WorldCom used aggressive accounting and heavy debt to finance acquisitions, masking true leverage until fraud emerged.
✨ Outcome：Graham-style analysis would reject high debt and opaque books, avoiding catastrophic losses when the firm collapsed.
2
Kinder Morgan Debt Reassessment (2015)
Kinder Morgan’s high leverage pressured its dividend when energy prices fell, forcing a major dividend cut.
✨ Outcome：A Graham-focused investor, wary of leverage, might have limited exposure or exited before the cut, preserving capital.

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