BOSTON ( TheStreet) -- To wager on stocks under $5, investors need to guard against pitfalls, with bankruptcy as the top concern. The Altman Z-score is one of the most helpful gauges, as it is one of only a few that determines which companies are at a higher risk of going broke.
The Altman Z-score, a formula developed by New York University professor Edward Altman in 1968, measures companies' financial health to predict which may enter bankruptcy within two years. The gauge was 80% to 90% accurate on samples of distressed firms one year prior to bankruptcy by examining working capital, retained earnings and other measures, according to Altman's study.
Altman Z-scores carry three classifications. Companies with an Altman Z-score of at least 3 are considered "safe," while those with 1.8 or less are "distressed." Those in between are in a gray zone. Some stocks trading under $5 even have a negative score.
TheStreet ranked companies on the New York Stock Exchange, NYSE Amex and Nasdaq trading at less than $5 with a minimum $5 million market value and the strongest Altman Z-score. Each company's quick ratio is given, which helps measure the ability to meet short-term obligations.
5. EpiCept (EPCT) Company Profile: EpiCept is a pharmaceutical company focused on the development and commercialization of pharmaceutical products for the treatment of cancer and pain. Altman Z-score: -60.46 Closing Price: 61 cents (Sept. 15) Financial Metrics: EpiCept has a negative book value, as liabilities outpace assets. However, EpiCept's quick ratio, which measures the ability to meet short-term obligations with its most liquid assets, is 1.2, indicating the pharmaceutical company should be able to meet its current liabilities. Analyst Consensus: Only one research firm covers EpiCept and recommends that investors buy shares of the company.