Debt in our method: the balance sheet filter that eliminates popular stocks
2026-06-22 · By Lubin Danilo, founder of Lubin Investment
In the Lubin method, debt is an elimination filter. A heavily indebted company faces higher fixed costs, reduced flexibility, and amplified losses during downturns. We measure debt two ways: the debt-to-equity ratio and the interest coverage ratio. Companies that fail this filter are excluded, regardless of how well-known they are.
- Debt raises fixed costs and reduces room to maneuver when times get hard.
- We measure debt two ways: debt-to-equity ratio and interest coverage by operating income.
- Very popular stocks fail this criterion: AT&T, Delta Airlines, Lennar.
- Solid companies pass the filter despite their size: Qualys (QLYS) and Kinsale Capital (KNSL).
- Growing without borrowing is the sign of real pricing power and superior capital efficiency.
Why debt changes everything
Many investors look at revenue, margin, or growth and forget the balance sheet. That is a mistake. A leveraged company is like a cyclist carrying a sandbag: it can move forward, but the hill kills it. Debt imposes fixed interest charges that must be paid even when revenues fall. During a downturn, the company has no freedom to cut prices, hire, buy back shares, or invest. It just survives. Companies without debt can attack.
How we measure debt: two ratios
First ratio: total debt to shareholders' equity. A ratio above 1 means the company owes more to its creditors than it is worth in equity. We prefer companies where this ratio is below 0.5.
Second ratio: interest coverage. We divide operating income by annual interest charges. We want at least 5, preferably 10 or more.
Popular stocks eliminated by this filter
| Company | Sector | Debt problem | Filter result |
|---|---|---|---|
| Delta Airlines (DAL) | Air transport | Massive structural balance sheet debt | Eliminated |
| AT&T (T) | Telecom | Enormous long-term debt from acquisitions | Eliminated |
| Lennar (LEN) | Homebuilding | Debt-to-equity ratio above 1 | Eliminated |
| Qualys (QLYS) | Cybersecurity SaaS | Near-zero debt, self-funded | Retained |
| Kinsale Capital (KNSL) | Specialty insurance | Cash exceeds total debt | Retained |
The deeper signal: growing without borrowing
The real reason we penalize debt is not accounting caution. It is a signal about the quality of the business model. A company that can grow without borrowing demonstrates real pricing power: its customers pay it enough to fund its own growth.
FAQ
Why is debt the first filter and not profitability?
Because a profitable but heavily indebted company can see its profitability disappear quickly if rates rise or growth slows. Debt creates structural fragility that undermines every other criterion.
What debt-to-equity ratio is acceptable in the Lubin method?
We target a ratio below 0.5. Above 1, the company is generally eliminated unless a very high interest coverage ratio justifies an exception.
Are utilities and REITs systematically excluded?
Most are, because their model structurally relies on leverage. This limits our universe, but raises the average quality of the companies we retain.
Are Qualys and Kinsale buy recommendations?
No. They illustrate what our method considers a healthy balance sheet. This is not investment advice.
Is a debt-free company always better than a slightly leveraged one?
Not necessarily. A ratio of 0.2 with interest coverage of 20 is perfectly acceptable. It is the constraint that matters, not debt itself.
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About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).