Standard Pacific's (SPF - Cramer's Take - Stockpickr - Rating) decision Monday to suspend its dividend is an example of how liquidity risk is now the most important consideration when looking at homebuilder stocks. In a market where some builders are even resorting to selling homes at a loss to create cash, it's important to determine which companies can manage to survive a downturn in housing that may last for several years. A helpful tool in doing so is the Z-score model, which has been shown to be a very powerful tool in predicting corporate bankruptcies. Edward Altman, an NYU Stern School of Business finance professor who is considered one of the world's foremost bankruptcy experts, developed the Z-score model in the 1960s and has been fine- tuning it ever since. The model uses five ratios and weights them to create a single Z-score value for a company: Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5 where: X1 = Working Capital/Total Assets X2 = Retained Earnings/Total Assets X3 = Earnings Before Interest and Taxes (trailing twelve months)/Total Assets X4 = Market Value of Equity/Book Value of Total Liabilities X5 = Sales (trailing twelve months)/Total Assets Z = Overall Index or Score The higher the Z-score, the less risk of bankruptcy. A Z-score of 1.8 is considered the upper bound of distress for a firm. How They Fare TheStreet.com calculated Z-scores for the 15 major homebuilders using the companies' most recent 10-Q filings. Only two companies had scores below 1.8, thus putting themselves in the distressed zone: WCI Communities (WCI - Cramer's Take - Stockpickr - Rating) (at 1.5) and Tarragon (TARR - Cramer's Take - Stockpickr - Rating) (at 0.3). Hovering right near the distressed zone are Standard Pacific, with a Z-score of 2.0, and Hovnanian (HOV - Cramer's Take - Stockpickr - Rating), with a score of 2.1. Standard Pacific plunged 12% Monday after suspending its dividend payments to shore up cash. Hovnanian does not pay a dividend for its common stock, but does for its preferred stock. The company's fire sale of new home inventory earlier this month exemplified the sad state of the homebuilding business. Beazer's (BZH - Cramer's Take - Stockpickr - Rating) 2.3 score may be a bit misleading, since the numbers are based on the period ended March 31. The company has delayed more recent filings because of accounting issues. Liquidity worries continue to surround the builder. KB Home (KBH - Cramer's Take - Stockpickr - Rating) and Centex (CTX - Cramer's Take - Stockpickr - Rating) put in lackluster Z-scores of 2.3 each. KB Home's Z-score was not adjusted for the recent $650 of debt redemptions. Z-score Model for Homebuilders SPF BZH (*) HOV WCI TOL NVR MDC RYL TARR CTX PHM MTH KBH LEN DHI Z-score 2.0 2.3 2.1 1.5 3.0 6.9 2.9 3.2 0.3 2.3 2.5 2.8 2.3 3.0 2.6 Price/book 0.3 0.3 0.5 0.3 0.9 2.2 1.0 0.7 0.3 0.7 0.7 0.5 0.9 0.7 0.8 * Beazer balance sheet items are from last 10Q, for qtr ended March 30, 2007 Note: Z-score of 1.8 is upper bound of distressed