Bankruptcy Watch: 14 Risky Restaurant Stocks

(Bankruptcy Watch: 14 Risky Restaurant Stocks report updated with Sonic's quarterly earnings results.)
NEW YORK ( TheStreet) -- Amid concern over a possible double-dip recession -- or at least some stall in the recovery -- in the midst of rising gasoline and food prices, bankruptcy is a real concern for any company, and the restaurant sector is certainly not immune.

American diners spent 40.5% of their food budgets eating away from home in 2010, down just slightly from 41% in 2006, according to data from the Bureau of Economic Analysis.

Chains such as McDonald's ( MCD), Chipotle Mexican Grill ( CMG) and Starbucks ( SBUX) continue to grow. But even so, a number of restaurant operators have filed for Chapter 11 bankruptcy protection in recent months.


Notably, Sbarro, the famously mediocre Italian chain, went bankrupt in April. The Perkins and Marie Callender's restaurant chains filed for bankruptcy in early June, with plans to close 65 of their 600 locations and cut 2,500 jobs. Even celebrity-backed restaurants have fallen: Eva Longoria's Las Vegas restaurant Beso filed for bankruptcy in January, and Michael Jordan's The Steakhouse NYC, which overlooks the renowned lobby of the Grand Central Terminal, went under in November of last year.

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 are more likely to go bankrupt. Anything in between is a grey 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 restaurants 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 restaurant 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 market capitalization of at least $100 million, but you can click through to the last slide for a complete chart of the 20 Riskiest Restaurant Stocks.

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