SUNNYVALE, Calif. (TheStreet) -- Palm (PALM) has been on a wild ride over the past two years.

From a high of $18 to a low near $1, the stock has gyrated because of its shaky finances, the hype surrounding its new devices and the subsequent disappointment over their sales and adoption by service providers.

Traders may have made a substantial profit with Palm, as is possible with any holding with high volatility. But long-term investors were probably burned by the company's recent share-price decline based on downgrades and outlook changes, poor sales numbers and weak carrier advertising support for the Palm Pre and Pixi. Analysts expect the company to continue to lose money through next year even though revenue is expected to increase.

There is little to attract investors to Palm. Many that may have made the mistake of confusing a great product with a good stock are probably kicking themselves for ignoring the warning signs that have been plainly obvious in the company's financial statements. While a high debt load won't necessarily prevent a stock from rising, it will increase risk. If the company misses its projections or fails to forecast the adoption of its products correctly, the servicing of liabilities can prove to be a major hindrance.
Stockpickr Answers
What should I do with PALM at this time?

Apple ( AAPL), Research in Motion ( RIMM), Nokia ( NOK), Motorola ( MOT) and now Google ( GOOG) are fighting for market share. It takes more than just a slick device to succeed. Without a strong financial backbone to subsist during lean times, device companies won't be able to compete for long.

Palm has a negative equity position, meaning the company has more liabilities than assets. As such, equity investors are simply purchasing the possibility of future cash flows -- as it stands now, Palm isn't able to cover its debts in a hypothetical liquidation. While the Palm Pre and Pixi may be technologically advanced, the fact of the matter is that Palm has accumulated more than $1.6 billion in losses and is viable only because a massive investment by private-equity firm Elevation Partners.

TheStreet.com Ratings has maintained a "sell" rating on Palm because of its scary financial statements. There's far more to a company than the products it makes. Promising technology, financial stability and competent management are the holy trinity.

-- Reported by David MacDougall in Boston.

Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.

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