How does Buffett view the use of leverage (debt)? What does Berkshire Hathaway's own balance sheet reveal?

Warren Buffett's View on Leverage (Debt)

Warren Buffett has consistently maintained a cautious, even oppositional stance toward using leverage. He believes that while leverage can amplify returns, it also magnifies risks, particularly during market volatility or economic downturns, potentially leading to catastrophic outcomes. In multiple shareholder letters, Buffett emphasized:

Avoiding High Leverage: Buffett views leverage as a "double-edged sword" that can make good companies better but can also cause bad companies to collapse rapidly. He often cites that "leverage is the enemy of the investor" or similar views, advising investors to prioritize debt-free or low-debt companies.
Conservative Financial Principles: Buffett advocates for growth through internal cash flow and equity financing rather than relying on debt. In his 1987 shareholder letter, he noted that leverage increases bankruptcy risk, stating that even excellent businesses can fail under debt burdens.
Leverage in Insurance Operations: Berkshire Hathaway utilizes insurance "float" (prepaid premiums) as low-cost "leverage." This differs from traditional debt, as float requires no high-interest payments and can be deployed for investments without borrowing.

Overall, Buffett advises ordinary investors to avoid leverage and focus on long-term value investing rather than short-term speculation.

What Does Berkshire Hathaway’s Balance Sheet Reveal?

Berkshire Hathaway’s balance sheet exemplifies Buffett’s conservative financial philosophy, showcasing minimal leverage and robust financial health. Key points include:

Low Debt Ratios: As of recent reports, Berkshire’s debt-to-equity (D/E) ratio typically remains below 0.5, often lower (e.g., ~0.25 in 2022), far below industry peers. This indicates primary reliance on equity and internal funds rather than external borrowing.
High Liquidity Assets: The balance sheet reveals substantial cash and short-term investments (e.g., >$100 billion cash reserves in 2023), providing a buffer against debt dependency. Float from insurance subsidiaries (~$160 billion) acts as "interest-free leverage" for reinvestment.
Reflected Philosophy: This underscores Buffett’s emphasis on safety—even in acquisitions (e.g., Precision Castparts or Alleghany), prioritizing cash over debt. The balance sheet demonstrates Berkshire’s resilience to economic shocks, such as weathering the 2008 financial crisis unscathed.
Potential Risks: Despite low leverage, insurance float carries inherent claims risk, though Buffett ensures sustainability through stringent underwriting.

Berkshire’s balance sheet is not only a model of financial health but also proof that a leverage-free strategy can achieve long-term compound growth, with annualized returns exceeding 20%.