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The Defensive Value Investor by John Kingham

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Chapter 4. Conservative Finances

“Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.”

Benjamin Graham

Companies are essentially a collection of assets, such as factories, equipment or cash in the bank, deployed in the pursuit of a common goal (either social, financial or a combination of both). How those assets are financed (such as through short-term credit, longer-term loans or shareholder equity) can have a dramatic effect on both the risks and returns that a company and its investors can expect to see.

As an example of how risks and returns are affected by a company’s funding arrangements, imagine a company that borrows £1m at an interest rate ...

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