Companies That Might Not Survive This Crisis

In "Balance Sheet 101: Who Might Survive This Crisis" (November 2008) I focused on companies with large net cash positions ("cash kings") and the concept of the "z-score," which is an indication of balance sheet strength and potential for bankruptcy.

At the end of "Balance Sheet 101: Who Might Survive This Crisis," I highlighted three companies that needed to get their fiscal house in order or could face possible bankruptcy. Since then, those three companies -- Macy's (M Quote), General Motors (GM Quote) and Time Warner (TWX Quote) -- have reported another quarter of financial results. All three companies have experienced further deterioration in business and have to resort to layoffs -- and in GM's case, a government bailout -- to try to steady their financial condition. As of the end of the last quarter of 2008, the z-scores for these three companies now stand at the following levels:

Macy's: 2.59 (moderate sequential improvement)

GM: -0.15 (moderate sequential decline)

Time Warner: -1.45 (large sequential decline)

(Source: All z-scores referred to in this article were obtained from Bloomberg.)

All three companies are still on bankruptcy watch, but the improvement at Macy's could take that company off of the endangered list.

In past editions of "Balance Sheets 101" I have placed several other companies on my endangered list that were highly probable candidates for bankruptcy, such as Six Flags (SIX Quote), Level 3 Communications (LVLT Quote), Sirius XM (SIRI Quote), Charter Communications (CHTR Quote), Alcatel-Lucent (ALU Quote), Sharper Image and Circuit City. Charter, Sharper Image and Circuit City have already filed for bankruptcy. Sirius XM is on the verge. (Update: "Sirius XM Soars on Liberty Media Rescue") The z-scores for the companies just mentioned that are still in business are all negative and might be very close to bankruptcy.

The companies with strong balance sheets, such as Apple (AAPLE Quote), Google (GOOG Quote), McDonald's (MCD Quote) and Gilead Sciences (GILD Quote), all continue to get stronger. However, as the economy and banking systems continues to falter, many companies are finding it more difficult to repay or refinance debt, as their revenues, earnings and cash flow decline. And the weak members of the business herd are going to get a visit from the Bankruptcy Angel of Death.

So, here are two companies that I'm adding to my endangered stock list.