(Bankruptcy scores updated with American Apparel cash infusion.)
NEW YORK (TheStreet) -- Bankruptcies in the retail sector are still a very disconcerting prospect.
In less than a year, we have witnessed the fall of two behemoths: Blockbuster (BLOAQ.PK) and Borders, an indication that there is always some weeding out to be done in the sector.
While consumer spending has returned substantially since the depths of the recession, those retailers that struggled prior to the downturn are finding it hard to continue to tread water.>Click here to take our bankruptcy poll. Given this, TheStreet is taking a look at some of the riskiest retailers in the sector based upon the Altman Z-Score, a formula developed by New York University professor Edward Altman in 1968. The Altman Z-Score measures several aspects of a company's financial health to forecast the probability of it going bankrupt within two years. Since its inception, the formula has been 72% accurate in predicting corporate bankruptcies two years prior from 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. >Bankruptcy Scores: 18 Riskiest Retail Stocks of Summer 2010
While the formula, of course, isn't the only indicator of the financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it is a metric worth considering for those retailers who fall below the safety zone. Those whose Z-Score is declining year-over-year may also raise a red flag. TheStreet previously conducted a mid-year analysis of the Altman Z-Score within the sector in July 2010, and found 18 retailers falling under the safety score of 3. Of those 18, three had a Z-Score under 1.8, including both Blockbuster and Borders. In light of this, TheStreet is taking another look at retail's riskiest companies. The list looks at those companies with a Z-Score below 3 for the full fiscal year, as compiled by I-Metrix, and is presented from the least risky to most risky.
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