27 Companies That Could Go Bankrupt

By David Sterman,

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Commercial bankers are a fickle lot. When theeconomy is growing, they trip over each other to extend loans to anybody with a business plan. But when theeconomy cools, bankers slam the lending spigot shut, denying loan applications to any new borrowers while taking a nervous stance with existing borrowers.

And this can spell trouble for any company that has been relying on credit lines or any other short-term loans. When aneconomy slows, bankers look for excuses tocall in these loans -- especially if a customer looks to be in a weak financial position.

Well, I've come across 27 companies that are starting to sweat. They all carry short-term loans (due in 12 months or less), and right now, they don't have enough cash on hand to come up with the funds if the bankers come knocking.

Covering their interest expense?

Not only do these firms need to worry about bankers calling in loans, they also need to keep an eye on theircash flow . In some instances, these firms are only earning enough to cover their interest expenses, let alone theprincipal amount on their loans. These 10 companies have too little cash on hand -- and they are also generating negative quarterlycash flow .

Back in November, I warned readers that stocks like American Apparel (AMEX: APP ) were headed for trouble. I checked back in around January, once again sounding the alarm bell. What's happened since then? The stock is hovering around $0.85, as you can see from the table above, the danger of bankruptcy is still there.

To assuage bankers, companies need to prove that they can at least generate enough cash flow to cover interest payments. These four companies have interest coverage less than 1.0 (which means that cash flow, though positive, is less than interest expense).

Of course, a quarterly snapshot may be unfair. Companies like PC Mall (Nasdaq: MALL ) may do the bulk of their business every year during the holidays, so interest coverage can look scary in a seasonally weak quarter. Still, the company would need to convince lenders to be patient until the end of the year rolls around. Having more debt than cash never makes a banker happy.

There are also companies that generate decent cash flow now, but must hope the economy doesn't get much weaker. If sales fall by a moderate amount, cash flow can often fall at a much faster rate. These 13 companies have an interestcoverage ratio between 1.0 and 4.0, which is "good enough" for now. Then again, every one of them has more short-term debt than cash, which is never a good position to be in.

If the U.S. economy muddles through and avoidsrecession , then many of these 27 companies will find a way to keep the bankers at bay, rolling over their debt into next year. Yet a few of these companies will likely fall prey to nervous bankers, and will see their loans called in.

If the U.S. slumps intorecession , then almost every one of these stocks will be vulnerable to bankers' whims. And once investors get word that a company has a problem meeting its debt obligations, massive sell-offs can occur.

Risks to Consider: Some of these stocks already trade at levels that suggest imminent financial distress. If they're able to shore up their weak balance sheets, short sellers may boost the stocks byshort covering . But if you own any of these stocks, it simply might not be a risk worth taking.

Action to Take --> If you own any of these stocks, then consider selling them now. Any one of them could tumble in a hurry. Instead, a much better bet for your money right now is what wecall "Forever" stocks . In short, these are the only stocks we know of that you can buy today and hold for the rest of your life.

StreetAuthority's co-founder and Chief Investment Strategist, Paul Tracy, has spent the past several months researching this opportunity, and he's put everything you need to know -- including several names and ticker symbols -- in a special presentation called " The 10 Best Stocks to Hold Forever ."

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing Basics
Referenced Stocks: APP , MALL

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