Shares of instant photograph company Polaroid (NYSE: PRD) traded at $20 per share a year ago, and nearly hit $30 in the fall of 1999, as sales of instant cameras reached record highs in 1999 and the company rolled out a series of edgy commercials. The forces of supply and demand drove shares of technology companies higher.

Today the shares are in penny-stock land, at about $4.12 each -- its market capitalization is just shy of $200 million -- as the company works to cut costs, reduce debt, improve manufacturing efficiency, trim its product line, and tie its instant developing products to the digital world.

Life isn't easy for a company such as Polaroid. Technology changes fast. Research and development is expensive. Keeping talented engineers happy takes work. And the super-fast, super-clean, digital world threw the paper-film developing industry into disarray.

But the average investor should rarely step into this kind of trap. There's just no reason to watch 100 shares at $20-something a stub wither into a stake worth less than $500 when it takes more work to put on sun-block than to have seen Polaroid's troubles coming.

Flash back to the summer of 2000 and open the company's latest 10-K. Polaroid generated $107 million in earnings before interest and taxes in 1999, and paid interest of $77 million. This gives the company an interest coverage ratio of 1.4, which doesn't leave much room for breathing. (The ratio is calculated by dividing earnings before interest, taxes, depreciation, and amortization (EBITDA) by interest expense and gives us a picture of a company's ability to pay down debt.)

Since companies pay interest with cash, not earnings, look at its cash flow statement. Cash from operations reached $131 million in 1999, but the company paid out $171 million for property, plant and equipment. From 1997 to 1999, capital expenditures exceeded cash from operations, meaning the company produced zero free cash flow.

It can be too easy to dismiss a company because it carries debt, but there are few burdens that get a company into trouble quicker. Investors can save themselves headaches by steering clear of companies that aren't producing enough cash to cover the costs of debt and capital expenditures.

Richard McCaffery doesn't own shares of Polaroid. He doesn't even own a camera. His stock holdings can be viewed online, as can The Motley Fool's disclosure policy.