Some of the most spectacular gains I have racked up on my stock picks have been made by screening for companies valued on large discounts to net asset value and where the intrinsic value in the company's assets is not being accurately reflected in the share price. As a secondary screen I try to avoid highly geared companies for the simple fact that I am happy to take on operational risk, but really don't want to expose myself to the financial risk of a company being unable to service its debts at the same time. In fact, I like companies with net funds so there is minimal financial risk. But even if I do recommend a company with significant borrowings, I always assess the cash generation of the business to decide whether underlying cash flows are strong and sustainable enough to comfortably service debt. As a result, I very rarely recommend shares in any company where net debt is above 80 per cent of shareholders' funds.
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