Navistar International Corporation (NYSE: NAV), is a manufacturer and retailer of commercial and military trucks, school and commercial buses, and diesel engines. What if the industry a company belongs to is performing well? Wouldn’t it be alright to invest in it?

Couldn’t said company with a high debt ratio on the expectation that it will grow itself out of it?

There is that possibility, which makes such investments a little more difficult to call.

The industry Navistar sells to — transportation — has been on fire since the economic recovery began in 2009. Where the Dow Jones Industry Average of 30 blue chip stocks has gained some 102% since then, the Dow Jones Transportation Average of 20 transportation companies has soared 158%.

So you might think any business that caters to transportation companies will do just fine. Until you look at Navistar’s books.

Although the mid cap generated $10.35 billion in revenues over the past 12 months, which is a fantastic 367% of its $2.82 billion market cap, its quarterly revenue growth year-over-year shrank 16.3%.

Its debt of $4.86 billion represents 172% of its market cap, with high operating losses of -7.95%. As a result, despite such high gross revenues, its EBITDA (earnings before interest, taxes, depreciation, and amortization) is a negative $543 million, with net income available to common equity of negative $992 million.

The company is taking value away from shareholders, not adding to it.

That its peers are faring so much better shows there is something wrong at NAV. By comparison, BAE Systems (OTC: BAESY) and Paccar Inc. (NASDAQ: PCAR) posted EBITDAs of +14.4% and +9.7% of their market caps, respectively, while NAV’s EBITDA was -19.3% of its market cap.

Again, debt seems to be the issue. Where NAV’s debt is 1.72 times its market cap, its two competitors’ debt is just 0.22 times and 0.38 times their market caps, respectively.

As Navistar’s troubles with profitability under heavy debt show, negative equity is something investors want to be wary of. Even if businesses generate steady cash flow that can cover interest payments today, what will happen when interest rates start to rise in a few quarters?

Higher financing costs are precisely what destroyed millions of homeowners when they could no longer afford their mortgages as rates rose. Rising rates will likely seriously damage companies like Navistar that are taking on way too much debt.

The raising of interest sparks an interesting question: From where do companies with negative equity keep getting their loans? Isn’t it risky to lend to companies that are underwater like that?

It is. One reason it’s so risky is because there are no assets left to use as collateral for new loans. Unsecured debt comes at a very high interest rate and is very attractive to private equity lenders and BDCs (Business Development Corporations), who are always on the lookout for high yield.

But we must also consider, what happens when one of a company’s biggest customers becomes one of its biggest rivals?

Navistar is about to find out. For the past 13 years, Navistar built Ford ‘s F-650 and F-750 commercial trucks, an approximately $400 million-a-year business. Beginning next year, Ford plans to start making the $55,600-and-up vehicles itself, cutting out Navistar.

Chief Executive Troy Clarke plans to patch the hole in production and revenue by chasing high-volume, medium-truck buyers such as big rental companies, municipalities and distributors. His idea: offer customers a wider variety of engine brands and transmissions, allowing them to customize trucks to their specific needs.

When considering which businesses to invest in and which to avoid, don’t simply look at the obvious annual revenues and cash flow — also look at the company’s equity balances. If net equity is negative, the company could be in trouble.