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TheStreet Open House

Stocks Under $5 at Risk of Bankruptcy

BOSTON ( TheStreet) -- Small-cap stocks have enjoyed a tremendous rally since the March 2009 low, although the recent losing streak for equity markets has stoked fears that bankruptcy for some companies with share prices below $5 is imminent.

There are few reliable ways of determining which companies are at a greater risk of going bankrupt than others. The Altman Z-score, a formula developed by New York University professor Edward Altman in 1968, is one of them.

The Altman Z-score 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.

With data provided by iMetrix, TheStreet found 10 companies on the New York Stock Exchange, NYSE Amex and Nasdaq trading at less than $5 with the lowest Altman Z-scores. The current ratio for each company is given, as that gauge can help investors measure the ability to meet short-term obligations. If a company with a low Altman Z-score runs into cash-flow problems, a failed new product or unexpected expenses, for example, the chance of bankruptcy rises.


10. PositiveID (PSID)

Company Profile: Formed after the 2009 merger of VeriChip and Steel Vault, PositiveID provides health- and security-identification tools to protect consumers and businesses.

Altman Z-score: -33.47

Current Share Price: 34 cents (June 7)

2011 Return: -45%

Current Ratio: 1.5, indicating that PositiveID should be able to meet its short-term liabilities with its current assets.

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