I rarely buy a stock with debt greater than stockholders' equity, or corporate net worth per share. In effect, that means I won't give a second look to about one third of US stocks.

Bankruptcy risk is only part of my concern. Low debt confers freedom: It gives a company strategic options. High debt is like a straightjacket that can push companies into choices they would prefer not to make.

High-debt companies may be forced to sell prized assets while keeping divisions that are dogs, simply because they need the money. They may fail to develop new products or make acquisitions because their lenders insist that new spending would violate debt covenants.

Such problems are most likely to pop up at the outer edge of the debt continuum. Of 2,625 US companies with a market value of $500 million (Dh1.8 billion) or more, 69 have negative net worth; that is, their debts exceed their assets. On the balance sheet, they have a hole where stockholders' equity should be.

Quite a few of these companies are familiar names, including airlines UAL Corp and AMR Corp, Freddie Mac and Fannie Mae, Domino's Pizza Inc and Revlon Inc.

Readers of the business pages will also know Unisys Corp, Navistar International Corp, Cablevision Systems Corp, Dun & Bradstreet Corp and Moody's Corp.

AMR, parent of American Airlines, has posted losses most years for the past decade. Its stock sells for about $10 a share, but the company's net worth as of December 31 was negative $10.49 a share.

Domino's Pizza made a name for itself by delivering pizzas in 30 minutes. Subtract Domino's liabilities from assets and you get a figure of about negative $23 a share. Yet the stock sells for more than $13.

Rivalry

Much better capitalised is rival Pizza Hut, which is owned by Yum! Brands Inc. Yum had stockholders' equity of $1.1 billion, and more than $350 million in cash as of December 31.

Domino's had stockholders' equity of negative $1.3 billion, and $42 million in cash. Which company do you think has a better chance of coming up with the pizza industry's next innovation?

Cosmetics maker Revlon has a net worth of negative $19.59 a share. Its stock trades at about $16. The company's bonds due in 2015 are rated B- (a junk rating) and have a current yield of 8.8 per cent.

By contrast, Procter & Gamble Co, which owns rival Cover Girl, has a AA- rating on most of its bonds. It pays less than three per cent interest on some of its debt, giving it a competitive advantage over Revlon.

Financially troubled firms often have sudden spurts of steep gains. That makes it tempting to play in this high-risk arena. Better see the Oscar-winning movie The Hurt Locker before you try it. This is a field strewn with landmines.