Will These Companies Drown in Debt?

If you need a real-world of example of the perils of investing in debt-laden stocks, look no further than Blockbuster.

After missing a debt payment, the struggling entertainment rental and retail company now has until Sept. 30 to cough up $42 million. That might prove difficult; as of the beginning of July, Blockbuster had $900 million in debt and only $64 million in cash. Many expect the company to file for bankruptcy protection soon.

Red flags
You can screen for companies like Blockbuster that might now or soon be in trouble. Here are a few I found with wildly lopsided debt-to-equity ratios and more short-term obligations than short-term assets (via the current ratio). Each also sports only one or two stars (out of five) from our CAPS community of investors:

Source: Motley Fool CAPS.

It might not be a big surprise to see Brunswick, a company associated with bowling, on this list -- despite its major marine and fitness operations. Its revenue has been shrinking at a 10% annual clip over the past five years. (Throw the company a bone, and take your family bowling!)

Given the auto industry's massive struggles in recent years, it makes sense for tiremakers to also find themselves in a tough spot. Goodyear recently issued $750 million in debt that was rated as non-investment-grade junk by Moody's. On a more positive note, it recently reported its third quarterly profit in the last 12 months, suggesting that its tide may be turning.

Harley-Davidson is a company with fans so ardent that they tattoo its name on themselves. But its finance division has had to take on increasing levels of debt, and the company has had a hard time boosting its revenue. The biker legend has thus been forced to cut its dividend.

These companies aren't necessarily doomed, but if you're thinking about investing in them, first make sure they can manage their debt. Remember that when bankruptcies happen, debtholders often get pennies on their dollars, while common stockholders tend to just get wiped out entirely. Fortunately, you don't have to settle for businesses that worry you. There are lots of bargains out there that will serve your portfolio much better -- and with far less stress.

The stock market's recent troubles have created some great buying opportunities.