📖Benjamin Graham

Financial Soundness

🌿 Intermediate★★★★★

Require current assets to be at least double current liabilities as a minimum test of financial stability.

💬

Current assets should be at least twice current liabilities.

— _The Intelligent Investor_，1949

🏠 Everyday Analogy

Just as a household emergency fund requires savings of at least 10,000 yuan to feel secure when monthly expenses are 5,000 yuan, a company should maintain current assets at least twice the amount of its short-term liabilities. This ensures that even in unexpected situations, the company will not face bankruptcy due to a broken capital chain.

📖 Core Interpretation

The current ratio should be at least 2, meaning current assets should be at least twice the amount of current liabilities.
💎 Key Insight：A 2:1 current ratio provides a buffer against short-term liquidity crises. Companies that cannot comfortably cover their near-term obligations are one downturn away from distress. This straightforward test eliminates financially fragile businesses before deeper analysis begins, saving time and protecting capital.

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❓ Why It Matters

Sufficient liquidity ensures that the company can navigate short-term challenges.

🎯 How to Practice

Review the current ratio and quick ratio to ensure the company's financial soundness.

🎙️ Master's Voice

Those who do not remember the past are condemned to repeat it.
Graham studied market history obsessively. He saw patterns repeat across generations as human nature remained constant.

⚔️ Practical Guide

✅ Decision Checklist

  • Do I know market history?
  • Am I learning from the past?
  • Am I seeing patterns?

📋 Action Steps

  1. Study financial history
  2. Learn from past bubbles and crashes
  3. Apply historical lessons

🚨 Warning Signs

  • Ignoring history
  • This time is different thinking
  • No historical perspective

⚠️ Common Pitfalls

✕Standards vary across different industries.
✕Some industries can accept lower ratios.

📚 Case Studies

1
Crash of 1929 and Aftermath (1929)
Graham’s partnership suffered huge losses in the 1929 crash, exposing over-leverage and inadequate margins of safety in his holdings.
✨ Outcome：He shifted to a more conservative, balance-sheet-focused approach emphasizing financial soundness and margin of safety.
2
American Express Salad Oil Scandal (1963)
American Express plunged after a fraud scandal tied to falsified salad oil inventories, raising concerns about solvency and reputation.
✨ Outcome：Graham-style analysis saw core financial strength; investors applying his principles bought shares, which recovered strongly over subsequent years.

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