1 Thing You Should Know About Level 3

A lot of investors love Level 3 Communications (Nasdaq: LVLT  ) for its masses of dark fiber bundles. They are willing to sit on Level 3 share until demand for that reserve network capacity suddenly spikes, fueled by online video and other newfangled bandwidth hogs.

But what these optimistic investors may be missing is that the company itself might not be equipped for a very long wait: Level 3's balance sheet is rotten to the core. Don't believe me? Take a look:

	FY 2007	FY 2008	FY 2009	LTM
Net Income (losses)	($1,150)	($318)	($618)	($759)
Operating Cash Flow	$231	$413	$357	$338
Capital Expenses	$633	$449	$313	$341
Cash Equivalents	$714	$768	$836	$442
Long-Term Debt	$6,864	$6,528	$6,552	$6,264

Source: Capital IQ, a division of Standard & Poor's. Amounts in millions.

I can live with negative income figures as long as cash flows are healthy, as that difference often indicates smart accounting practices more than troubled operations. And I would never have bought shares of Advanced Micro Devices (NYSE: AMD  ) if low cash balances and high debt loads scared me.

But take two parts weak earnings, one part rarely breakeven free cash flows, and a dash of deeply flawed capital balances, and Houston, we may have a problem.

Level 3 needs that data demand boom to happen stat, before the company runs out of cash. The Altman Z score is solidly negative, indicating a large bankruptcy risk; the company has high amounts of its shares sold short as opportunistic pessimists smell blood in the water; backbone rivals such as Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) generally don't suffer from such troublesome financials; and I think it's admirable of Level 3 to head into new field like content delivery services, but Akamai Technologies (Nasdaq: AKAM  ) is kicking butt and taking names in that market, which leaves little room for a Level 3 to make up for its other shortcomings here.

Granted, Level 3 looks incredibly cheap right now with shares trading at less than half of trailing-12-month sales. Risk-loving turnaround hunters could make money here if everything goes Level 3's way. But given the enormous risks involved, you could bet on bandwidth growth by investing in Akamai or Cisco Systems (Nasdaq: CSCO  ) instead -- and sleep better at night.

Where do you stand? Discuss Level 3 in all its flawed glory in the comments below.