Bankruptcy Watch: Stocks Under $5

BOSTON (TheStreet) -- To wager on stocks under $5, investors need to guard against pitfalls, with bankruptcy as the top concern. The Altman Z-score is one of the most helpful gauges, as it is one of only a few that determines which companies are at a higher risk of going broke.

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 strongest Altman Z-score. Each company's quick ratio is given, which helps measure the ability to meet short-term obligations.


5. EpiCept ( EPCT)

Company Profile: EpiCept is a pharmaceutical company focused on the development and commercialization of pharmaceutical products for the treatment of cancer and pain.

Altman Z-score: -60.46

Closing Price: 61 cents (Sept. 15)

Financial Metrics: EpiCept has a negative book value, as liabilities outpace assets. However, EpiCept's quick ratio, which measures the ability to meet short-term obligations with its most liquid assets, is 1.2, indicating the pharmaceutical company should be able to meet its current liabilities.

Analyst Consensus: Only one research firm covers EpiCept and recommends that investors buy shares of the company.

4. New Generation Biofuels ( NGBF)

Company Profile: New Generation Biofuels is a renewable-biofuels provider that is marketing a new class of "second generation" biofuels for use in diesel-fuel applications, including power generation, commercial and industrial heating, and marine transportation.

Altman Z-score: -64

Closing Price: 18.5 cents (Sept. 15)

Financial Metrics: Like EpiCept, New Generation Biofuels has a negative book value per share. New Generation Biofuels' quick ratio, which measures the ability to meet short-term obligations with its most liquid assets, is a mere 0.1, indicating the company would have difficulty meeting its current liabilities.

Analyst Consensus: The sole analyst covering New Generation Biofuels has a "buy" rating on the stock.

3. TearLab ( TEAR)

Company Profile: Formerly known as OccuLogix, TearLab is an ophthalmic-device company commercializing a proprietary in-vitro diagnostic-tear testing platform, the TearLab test for dry-eye disease.

Altman Z-score: -88.82

Closing Price: $2.62 (Sept. 15)

Financial Metrics: TearLab has a price-to-book ratio of 3.4, which suggests the stock may be overvalued based on book value. TearLab's quick ratio, which measures the ability to meet short-term obligations with its most liquid assets, is 1.5, indicating the ophthalmic device company should be able to meet its current liabilities.

Analyst Consensus: No analyst covers TearLab.

2. Nymox Pharmaceutical ( NYMX)

Company Profile: Nymox Pharmaceutical is a biopharmaceutical company engaged in the research and development of diagnostics and drugs for brain disorders and diseases of the aged with an emphasis on Alzheimer's disease.

Altman Z-score: -114.08

Closing Price: $3.72 (Sept. 15)

Financial Metrics: Nymox Pharmaceutical has a negative book value, as liabilities outpace assets. Nymox's quick ratio, which measures the ability to meet short-term obligations with its most liquid assets, is 0.5, indicating the company would be unable to meet its current liabilities.

Analyst Consensus: No research firm has coverage of Nymox Pharmaceutical.

1. Asure Software ( ASUR)

Company Profile: Asure Software is a provider of Web-based workforce-management services that enable organizations to manage its office environment as well as human-resource and payroll processes.

Altman Z-score: -158.84

Closing Price: $2.59 (Sept. 15)

Financial Metrics: Asure Software has a price-to-book ratio of 2.97, which suggests the stock may be overvalued based on book value. Asure's quick ratio, which measures the ability to meet short-term obligations with its most liquid assets, is 0.6, indicating the software company would have trouble meeting its current liabilities.

Analyst Consensus: No analyst covers Asure, although one research firm had a "buy" rating on the stock about three months ago.

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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