It's also instructive to look at how a company uses its cash. Companies that are building aggressively for the future often invest heavily in capital spending by opening new stores or building new manufacturing facilities. But there's a host of other things a company can do with its extra dollars, including buying out other firms, paying off debt, building up reserves, buying back stock, or paying dividends. Digging into the cash-flow statement to find out where the money's going can often shed light on management's strategy and give you additional insight into where the company might be headed in the future. For more information, see Rika Yoshida on Evaluating Cash Flow and Haywood Kelly on What Free Cash Flow Tells Us .
Companies are no different.
Taking on debt can give them the flexibility they need to build new plants, finance research efforts, or make it through a short-term cash crunch. But too much debt can definitely be a bad thing. That means that it has to use a significant portion of its income just to pay off debts. And if the company wanted to obtain additional financing or upgrade its facilities, it would probably have a tougher time than a company that carried a lighter burden. For more on debt, see David Kathman on the Dangers of Leverage .