After many years of investing, I realized that I needed to focus as much, if not more, on the company’s balance sheet. Receivables, inventory, payables, fixed assets. And most important of all, debt. Corporate finance theory has a thing for leverage. For those of you who are not familiar with it, finance academics claim that companies need to have an “optimal” level of leverage to improve returns.18 If a company can borrow money to purchase assets, its return on equity and earnings per share should improve. Mathematically, this is undoubtedly true. Realistically, this is undoubtedly dangerous.
