NEW YORK (TheStreet) -- Hotel operators have benefited from the return of business travel, though leisure demand continues to lag in the recovery. While room rates and occupancy levels have improved, some individual hoteliers are not out of hot water just yet.
Several big-name hotel companies -- such as Marriot (MAR) and Hyatt (H) -- have shown marked improvement; yet others have been forced to file for bankruptcy protection or been foreclosed upon over the last few years. Notable among them: Palm Beach, Fla.-based Inkeepers USA Trust, which owns and operates hotels under brand names that include Hilton, Hyatt and Marriot; River Road Hotel Partners, the operator of an InterContinental Hotel (IHG) near Chicago's O'Hare International Airport; and Extended Stay America, a bankruptcy subsequently blamed on debt loaded upon the company after its leveraged buyout by Blackstone Group (BX).
One way to test if a company runs the risk of filing for bankruptcy is through 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 -- including working capital, total assets, total liabilities, market capitalization, sales, retained earnings and earnings before interest & taxes (EBIT) -- 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 to the filing, according to Investopedia.
On a general basis, companies with a Z-Score higher than 3 are considered safe with little danger of bankruptcy, while those with a score of 1.81 or lower are considered distressed and more likely to go bankrupt. Anything in between is a gray area. While the formula, of course, isn't the only indicator of financial health -- and is by no means a guaranteed barometer of a company's bankruptcy risk -- it is a metric worth considering for those hotels that fall below the safety zone. Those with a declining Z-Score year over year may also raise a red flag. Taking this into account, we offer the hotel chains with a Z-Score below 3 for the trailing 12 months, according to data from I-Metrix, from the least risky to the most risky, with a little detail on what each company has been up to lately. We limited our analysis to companies with a stock price of at least $1. Click through the slideshow to read about the riskiest hotel stocks, or jump directly to a graphic chart of the complete list. (Altman Z-Scores based on July 8, 2011 data.)
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