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Bankruptcy Watch: 8 Risky Casino Stocks

NEW YORK ( TheStreet) -- Is the casino sector in dire threat of going bankrupt over the next two years? According to the Altman Z-Score ... maybe.

The Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968, measures several aspects of a company's financial health to forecast the probability of it going bankrupt. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior to the filing.

On a general basis, companies with a Z-Score higher than 3 are considered safe, while those with a score of 1.8 or lower are considered distressed. Anything in between is a gray area. Using I-Metrix, TheStreet has determined that of the eight casino operators with a market cap over $200 million, all have a score below 3, and seven of the eight are residing in the danger zone, with a score lower than 1.8.

>>3 Low-Risk Gaming Stocks

Logically, of course, the demise of the entire casino sector is highly unlikely. Despite most of the casino operators holding a Z-Score of less than 1.8 over the past five years, all remain alive and kicking. Indeed, the primary reason casino stocks are plagued with depressed Z-Scores is is that casinos were entangled in an arms race for several years, during which time they attempted to see who could build the biggest and most expensive casino. Thus, the entire sector is highly leveraged, which drives up their financial risk.

"Casinos believed they could put $1 billion into the ground and would get $3 billion return, but that's not what happened," says Alex Calderone, who provides turnaround and crisis management services for the gaming sector at Conway MacKenzie. "Most companies won't make enough to service the massive amount of debt they incurred as a result of these developments."

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