Too much debt: bye-bye birdie; When the canaries start dropping, it's only a matter of time before debt knocks you off.

• Author: Sutton, Gary
• Position: SUTTON'S LAWS - Corporate Canaries: Avoiding Business Disasters with a Coalminer's Secrets - Book Review

Ed. Note: Columnist Gary Sutton's latest book, Corporate Canaries: Avoiding Business Disasters with a Coalminer's Secrets, is being published in October 2005 by Nelson Business (www.thomasnelson.com). The following is an excerpt.

A CENTURY AGO coal miners hung canary cages in their tunnels. The little birds went silent and dropped when poison gas seeped into the mine, before any miners were hurt, saving lives. It's the same with corporate canaries, which tell you when a business is threatened.

When debt fuels your growth, your canary gasps. Soon your business will be in other hands. That little yellow bird will stop chirping and start quivering. Maybe not for several years. Maybe next month. Sooner is better, since in a few years, the delusion will have metastasized, the debt will have grown, and more miners will meet a bad end.

If your corporate policy is always to lease, never to buy, that's one indicator that you've got too much debt. You're over-leveraged. Take a look at a few leasing companies' financials. They make more money than their clients.

If your company's debt to equity is over 1:1, you've got too much. You've developed a bad habit, and unless it changes, it's bye-bye birdie.

If your executive team spends more time with bankers than with customers, your canary is wheezing. Bankers loan money. That means they'll want it back, plus interest. Customers give you money to keep. So where should more time be spent? Canaries chirp when customers are visiting; they cannot be heard when lenders march through your hallways.

There are moments and situations where debt-financed growth is shrewd, under the assumption that some larger company will acquire you before the next down cycle slaughters the business. Or you want to seize a new market before others get in. This high risk takes more agility and energy than most employee groups possess. That sometimes works. But only for companies that are fleet of foot with nerves of steel.

Craig McCaw creates those kinds of companies. In 1983, he and I took a business seminar at Harvard for small company CEOs. It lasted three weeks, with sequels in 1984 and 1985.

McCaw then ran the 41st largest cable television company in the U.S. I was in the top 100 printers of America. One night we prepared a case study together, dealing with a new concept called cellular phone service. Craig didn't return for the second or third year, so I forgot the slacker.

What McCaw was doing was buying the cell phone rights...