Any role-playing game fans out there can probably relate to the plight of Level 3 (NASDAQ:LVLT) investors. Like a first-level mage, there's great potential power down the road with the business. But for now, at least, it can't seem to surmount the equivalent of a lone asthmatic goblin.

Interpreting the company's mixed third-quarter results is a fairly subjective exercise. Revenue was down 5% from the year-ago level; communications revenue decreased 14%, and information services revenue rose 6%. Somewhat more encouragingly, the voice and transport/infrastructure units did all right in their own respects.

Gross margin picked up a bit sequentially but was down year over year, and the company's operating loss was 65% higher than in the year-ago period. Cash flow performance was stronger, though. Operating cash flow was positive, and though free cash flow was negative, the deficit was smaller on both annual and sequential comparisons.

There were also some encouraging words behind the numbers. Prices are declining more slowly, and demand is still firm. Of course, the capacity problem remains -- demand for network capacity is strong and growing, but there's still a glut of available capacity. Services like broadband Internet and voice over Internet protocol should take up more and more of this surplus, but that's going to take years.

No doubt Level 3 has good technology and customers -- including the likes of SBC (NYSE:SBC), TimeWarner (NYSE:TWX), Microsoft (NASDAQ:MSFT), Comcast (NASDAQ:CMCSA), and Verizon (NYSE:VZ) -- but it's also got $6 billion in debt. Unlike the cable or cell phone companies of the '80s and '90s, Level 3 can't assume that its large initial losses will be offset by concurrent revenue growth and potential monopoly power.

I've got to wonder why this company has delivered such large bonuses to its management team -- $2 million for the CEO last year, as well as two other $1 million-plus awards for other managers. I like the companywide notion of stock options that pay off only if the stock outperforms. But why, then, should the managers also get nice fat cash awards? Finding and retaining a management team capable of losing money isn't too hard.

Anyone who holds these shares today is likely a trader or speculator. That, or they have a great deal of faith in the idea that all of Level 3's built-out capacity will turn into real profits and shareholder value. Since I neither speculate in stocks nor invest on faith, I'll be staying well away from these shares.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). SBC and Time Warner are Motley Fool Stock Advisor recommendations. The Fool has a disclosure policy .