Lynch emphasizes the critical role of debt structure in determining a company's survival during financial crises. He contrasts two companies, Applied Materials and GCA, to illustrate this point. Applied Materials, with minimal debt and substantial cash reserves, rebounded strongly when the market improved. In contrast, GCA, burdened with bank debt, went bankrupt. Lynch explains that bank debt, which is due on demand, can force a company into bankruptcy if it cannot repay immediately. Conversely, funded debt, such as long-term corporate bonds, provides companies with the flexibility to navigate through tough times as long as they can meet interest payments. This insight underscores the importance of evaluating a company's debt structure when considering investments, especially in turnaround situations. | Peter Lynch | One Up On Wall Street

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Finance

The Importance of Debt Structure

Lynch emphasizes the critical role of debt structure in determining a company's survival during financial crises. He contrasts two companies, Applied Materials and GCA, to illustrate this point. Applied Materials, with minimal debt and substantial cash reserves, rebounded strongly when the market improved. In contrast, GCA, burdened with bank debt, went bankrupt. Lynch explains that bank debt, which is due on demand, can force a company into bankruptcy if it cannot repay immediately. Conversely, funded debt, such as long-term corporate bonds, provides companies with the flexibility to navigate through tough times as long as they can meet interest payments. This insight underscores the importance of evaluating a company's debt structure when considering investments, especially in turnaround situations.

-- Peter Lynch