Nearly all discussion of radio in recent years has revolved around satellite radio operators Sirius (NASDAQ:SIRI) and XM (NASDAQ:XMSR). With major media personalities and listeners flocking to their stations, it's no wonder that these stocks command growth investors' rapt attention.

I hate to be a party crasher, but an investment in satellite radio is nothing more than sheer speculation -- these companies' financial performance is terrible. Over the past 12 months, XM and Sirius have combined for a staggering $1.3 billion net loss, and negative free cash flow of $644 million. The balance sheet is even worse, with the companies carrying a combined $2.9 billion debt against just $660 million in cash.

I don't shy away from speculative investing -- in fact, I encourage it. But value-oriented investors who want honest-to-goodness profits and free cash flow should avoid satellite for now, looking instead toward traditional terrestrial-based radio. While the radio station operators are having difficulties of their own, amid tough advertising environments and debt-laden balance sheets, one stands out as a possible solid value investment.

The sorry state of radio
For this article, I focused on seven small caps among the fairly tiny pool of domestic broadcasters. I knocked satellite radio for its blood-red income statement and mountain of debt, but I have little good to say about many of the terrestrial radio operators, either. Not only do they lack the pizzazz and growth potential of Sirius and XM, but they're also drowning in debt of their own.

Many of these companies seem one wrong move from bankruptcy. Cumulus Media (NASDAQ:CMLS), Emmis, and Salem Communications (NASDAQ:SALM) are struggling to cover interest payments with operating income. I think investors have to stay away from situations like these, especially in this industry, where advertising revenue faces intense pressure. Further deterioration on the top line will get painful fast, especially with those fixed interest payments hanging overhead.

I'm not opposed to debt in principle; it can helpfully lower a company's cost of capital. However, when taken to the extremes that most of the radio operators have reached, it's akin to wrapping yourself in a hungry boa constrictor and hoping you don't get squeezed.

Company

Market Cap

Revenue

Earnings

FCF

Cash

Debt

Citadel Broadcasting (NYSE:CDL)

$676

$588

($438)

$124

$113

$2,463

Cox Radio (NYSE:CXR)

$1,180

$444

($34)

$101

$4

$330

Cumulus Media

$388

$332

($121)

$46

$12

$738

Emmis Communications

$150

$354

$7

$22

$19

$466

Entercom Communications (NYSE:ETM)

$714

$467

$8

$70

$10

$735

Radio One

$250

$360

($26)

$35

$22

$836

Salem Communications

$177

$234

$11

$31

$1

$354

Source: Capital IQ. All figures in millions for trailing 12 months, and presented on a GAAP basis.

The lone standout
Cox Radio seems to be the best chance for a deep value investment among  this group -- and not just because its stock has taken a severe seven-year slide. The loss of $34 million on the income statement is largely due to a $176 million asset writedown. The company has consistently generated operating income near $140 million since 2002, and it's generating tons of cash. Free cash flow over the last four quarters came in at $100 million.

Despite a sizable amount of debt, Cox has a comfortable interest coverage ratio of nearly 7 to 1. During Cox's last earnings call, the CFO commented that executives know they have low leverage (for the industry) and feel it's a great place to be, particularly in a softening economy. In addition, Cox is actively buying back shares; it repurchased $26 million last quarter, with authorization to buy another $87 million.

Cox's ownership situation presents an interesting twist. Cox Enterprises, which owns 67% of outstanding shares, had a similar ownership stake in cable company Cox Communications. In 2004, it took the cable company private in an $8 billion transaction. At the time, cable firms' stocks were depressed over competitive fears. That situation is very similar to what we're seeing at Cox Radio now, with its share price at the lowest point this decade.

A classic cigar butt
Old-school radio is clearly not a growth industry; these firms have shown stagnant top lines for years on end. Though their revenues could shrink, I doubt that the industry will disappear entirely. Most of these companies should not be touched, but Cox Radio breaks the mold, thanks to its unorthodox ownership situation and the gobs of cash flow it's generating. Cox is the best company in a bad industry. With shares trading at 12 times free cash flow, value investors should give Cox a look -- starting, perhaps, with its CAPS page.

Entercom Communications is an Income Investor recommendation. XM Satellite Radio is a former Rule Breakers pick. You can tune into either newsletter free for 30 days.

Fool analyst Charly Travers does not own shares of any company mentioned in this article. The Fool has a no-holds-barred disclosure policy