BOSTON (TheStreet) -- Companies that trade for less than $5 a share typically are viewed as speculative and at risk of going broke. That's not always the case. Fortunately for investors, there is a reliable measure to help predict a company's bankruptcy risk.
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 highest Altman Z-score. Each company's quick ratio is given, helping to measure the ability to meet short-term obligations.
5. American DG Energy (ADGE) Company Profile: American DG Energy distributes, owns and operates clean, on-site energy systems that produce electricity, hot water, heat and cooling. Altman Z-score: 54.8 Closing Price: $3.15 (Sept. 15) Financial Metrics: American DG Energy has a price-to-book ratio of 11.8, which suggests the stock may be overvalued based on book value. American DG Energy's quick ratio, which measures the ability to meet short-term obligations with its most liquid assets, is 1.4, indicating the energy-systems company should be able to meet its current liabilities. Analyst Consensus: There are currently no research firms with coverage of American DG Energy.
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