Cramer's Mad Money Recap: Stock School

Ground Those Airlines

So, how does one decide which companies are good and which companies are bad? It takes having a rubric and rigor, said Cramer.

The first step is to be sure you're investing in companies that make money and do not have a lot of debt, said Cramer.

Debt is often overlooked, he said, but you have to pay attention to it to accurately value a stock.

The reason is, he said, a company with too much debt may not be able to pay its bills if its business gets into trouble. And your stock is collateral for the company's debt.

"Debt matters," said Cramer. "Lots of debt can strangle a healthy business." If the company goes bankrupt, the shareholders usually wind up with nothing. People who own the debt, "get first dibs to cannibalize the company," he said.

All debt isn't necessarily bad, said Cramer, but you need to be careful with it. For example, retailers often take on debt in the fourth quarter to buy merchandise for the holiday season. That's acceptable, said Cramer, as long as sales turn out to be good.

Cable companies might need to take on debt to finance building their networks. That's understandable, said Cramer.

Airlines take on debt to buy expensive planes. That too is understandable, he said, adding, however, that he would never recommend investing in an airline.

Cramer said it is only wise to invest in companies emerging from bankruptcy if you've read the bankruptcy trustee's report to find out if the common stock is worth anything.

Cramer says he's rarely done well investing in such a situation, however.