Do defensive investors need to study company financial statements?

Core Answer: Yes, but no need to "intensively analyze" like an expert

Yes, defensive investors absolutely need to examine financial statements. But don’t be intimidated by the word “research”—it doesn’t mean you have to dissect every number in the reports like an accountant or professional fund manager, or build complex financial models.

Think of it like buying a used car.

You’re not a mechanic. You might not tell a timing belt from a fan belt. But you’d still pop the hood to check for oil leaks, sit in the car to check the mileage, and ask the owner about maintenance records and major accidents.

For defensive investors, reviewing financial statements is this basic inspection. The goal is to avoid obvious red flags, not to find a "superstock" that will soar 10x.

Why Bother? What If You Skip It?

The core of Graham’s defensive investment strategy is safety and peace of mind. He outlines simple, effective screening criteria:

• Adequate company size
• Strong financial position
• Consistent profitability over the past decade
• Uninterrupted dividend payments for 20+ years
• Reasonable valuation (limited P/E and P/B ratios)

None of these can be verified without financial statements:

• Size? Check "Total Revenue" (Income Statement) and "Total Assets" (Balance Sheet).
• Financial health? Examine the debt-to-equity ratio (Balance Sheet). Avoid companies drowning in debt.
• Profitability? Review "Net Profit" consistency over years (Income Statement).
• Dividends? Check "Cash Dividends Paid" (Cash Flow Statement) or summarized dividend histories.
• Valuation? Calculate P/E (Price/EPS) and P/B (Price/BPS). EPS (Income Statement) and BPS (Balance Sheet) are foundational.

Skipping the statements is “blind buying.” Relying on hype or a flashy name isn’t investing—it’s wishful thinking. If the company is bleeding cash or debt-ridden, your portfolio isn’t “defensive.”

What to Look For? How? (For the Ordinary Investor)

No expertise needed. Focus on a few key metrics for a basic “health check”:

1. Physical Check (Size & Standing) - Balance Sheet & Income Statement
   • Metrics: Total Assets, Total Revenue.
   • How: Target industry leaders (e.g., compare to giants like Moutai in baijiu stocks). Large firms are less prone to collapse.
2. Health Check (Financial Safety) - Balance Sheet
   • Metric: Debt-to-Asset Ratio (Total Liabilities / Total Assets).
   • How: Lower is better. Below 50% is generally healthy. High leverage = high risk during downturns.
3. Vitality Check (Profitability) - Income Statement
   • Metric: Net Profit.
   • How: Review 5-10 years. Seek consistency, not wild swings (e.g., +¥1B one year, -¥2B the next).
4. Shareholder Treatment (Dividend Culture) - Cash Flow Statement or Dividend History
   • Metric: Cash Dividends.
   • How: Prioritize firms with a long, uninterrupted payout history—a sign of maturity, stability, and shareholder respect.
5. Value Check (Pricing) - Income Statement & Balance Sheet
   • Metrics: Earnings Per Share (EPS - Income Stmt), Book Value Per Share (BPS - Balance Sheet).
   • How: Calculate P/E (Price/EPS) and P/B (Price/BPS). Graham’s defensive thresholds: P/E ≤ 15, P/B ≤ 1.5. This price tag prevents overpaying.

Summary

So, does a defensive investor need to research financial statements?

Answer: Yes, but the purpose is to verify if the company meets defensive safety thresholds, not to conduct deep-dive analysis.

You don’t need to be an expert—just a layperson who can read a basic “physical exam report.” Mastering these key metrics lets you filter out >90% of risky or overpriced stocks, ensuring Graham’s margin of safety for a steadier, simpler investment journey.