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Tip #1 – Run away from companies with too much debt.

A thorough review of company debt is one of the simplest ways to judge if a cheap stock is worth your hard-earned money. The analysis is very simple and doesn't require any special investment knowledge. In fact, you can find out if a company is utilizing its debt properly with just a few basic questions:

• How much debt does the company have?
• Is the company's debt growing?
• Are they increasing their earnings by utilizing the debt, or has their expanded debt decreased their income?

Keep in mind that not all debt is bad — without debt, many great businesses would never have gotten off the ground floor. Debt allows a company to grab opportunities to make extra money, including expanding their product lines, purchasing other businesses or making investments to update their fixed equipment.

But sometimes, companies — just like individuals — overdo the debt. Their plans are too rosy, and the debt they take on not only does not add to their income, but becomes a noose around their neck, often creating a deepening hole of borrowing money to repay borrowed money. Before you know it, they are in big trouble, especially in a weak economy when easy credit disappears.

NEXT – Tip #2