I have a feeling it's been terribly difficult for many individual investors to avoid the temptation to snap up shares of well-known companies that are trading in penny stock range. If you're one of them, I implore you: Don't give in to that temptation without doing your homework, and sometimes even admitting that you're taking a gamble. Most of those beaten-down stocks are beaten down for a darn good reason.

The macroeconomic climate right now is brutal. Massive deleveraging is nothing to mess around with. Many companies will be blown right out of the water. Not only did many consumers have too much debt, but many companies did, too. It's a terrible brew of nastiness.

And now that consumers are dealing with plunging asset values, untenable debt, and increasing job losses, many companies' sales are understandably pinched, making it more difficult to service their own debt or borrow more to fund their operations. It's a domino effect, and it's ugly.

Going, going, gone?
Last year, many people made wild bets on financial stocks like Fannie Mae , Freddie Mac , and Merrill Lynch. I'd venture to guess many of these folks blew off the importance of balance sheets, which are more important than ever in these troubled times.

Meanwhile, the continuing drumbeat of balance sheet pain is being illustrated in the increasing numbers of companies that are disclosing "going concern" warnings from their auditors. You can find those warnings in a company's quarterly (10-Q) or annual (10-K or 20-F) filings with the Securities and Exchange Commission.  Usually there will be a paragraph with language about factors that "raise substantial doubt as to our ability to continue as a going concern." One of the most well-publicized recent examples of a company where increasing financial difficulties made people wonder about its ability to continue as a "going concern" was CIT Group (NYSE: CIT).

When companies find it increasingly difficult to make ends meet, have negative cash flow, or can't find anybody to lend them money, auditors often eventually question their abilities to continue as "going concerns." You can imagine those traits are increasing these days.

Image Entertainment (Nasdaq: DISK), Hoku Scientific (Nasdaq: HOKU), Russia's Mechel (NYSE: MTL), Security Bank (Nasdaq: SBKC), and inTEST Corp. (Nasdaq: INTT) have all disclosed such auditor warnings recently. Even though some of these companies are taking actions such as renegotiating with lenders for the near term (Mechel has received short-term refinancing, giving it a respite, for example), it's still a dire sign that investors should take very seriously.

Accountants are usually reluctant to issue such warnings. According to a recent survey, only about half of companies that filed for bankruptcy in 2001 had actually received "going concern" warnings, so you can bet that when a company does receive one, accountants believe it has some serious issues to contend with. Continued...