I found it interesting that ABC Funds sold Dominion Homes a week ago.  I too owned DHOM but sold out (at a 41% loss) for the same reason: Too much debt.  This is what ABC Funds said:

Unfortunately, housing demand slowed sharper than we expected in Ohio and Kentucky and DHOM struggled to find new buyers for its homes. Unit sales declined 24% in 2005, and 30% in the first nine months of 2006. Despite rising costs and falling sale prices, DHOM continued to invest in new housing projects. This hurt margins and left virtually no free cash remaining for debt reduction or share repurchases. With many economists predicting another tough year ahead for housing markets, we are concerned about both the company's ability to generate free cash flow and its deteriorating balance sheet. While DHOM sales could eventually return to previous levels, we are however, no longer comfortable with the company's debt level given that earnings and free cash flow are likely to remain negative for the foreseeable future. After considerable analysis, we decided to sell our shares upon learning that DHOM's debt had been sold by its banks to two hedge funds. We are concerned that the hedge funds' interests may not be aligned with the interests of equity holders.

Dominion Homes (DHOM) had $115 million of long term debt in 2003 and grew that debt 85% to $215 by 2006.  Yet sales decreased 26% from $563 million in 2003 to $416 million in 2006.  Earnings per share declined 84% from $4.01 in 2003 to $0.66 in 2006.  One has to wonder why they doubled their debt while earnings dropped one-sixth? DHOM is a classic case of poor use of leverage.

This debt lesson, it seems, I have learned countless times over the past year or two.  Levered companies are great investments if and only if the company is growing sales, earnings, and cash flows.  You might be able to get away with a company that generates tons and tons of cash – one of my stocks, UST, fits this profile – but that is rare.  (In UST's case, they generate enough cash to pay off their debt in a few quarters if they wanted to.)  Other than that, growth is essential.  And this growth must be dramatic.  A company doubling earnings every year or two is dramatic.  Otherwise, you run the risk of buying a bad business with bad economics.  Sure they might eventually get bought out, or have enough assets to cover the debt after all that's said and done, but if there is not enough cash flow to service interest payments, future growth, and unexpected obstacles, more often than not the stock will go into a freefall first.  In the case of DHOM, that is just what happened.