Struggling retailer J.C. Penney (NYSE: JCP) has reported a net loss in each of the past four years. The company's balance sheet is loaded with debt -- over $5 billion as of the most recent earnings report -- resulting in over $400 million of interest payments per year. Sales collapsed when former CEO Ron Johnson attempted a dramatic makeover a few years ago, and while some progress has been made since then, J.C. Penney is still generating far too little revenue.

While any immediate threat of bankruptcy has subsided, with the company having around $2 billion worth of liquidity available in the form of cash and credit lines, the current state of the business is unsustaꦇinable. How much time does J.C. Penney have to turn🌊 things around before bankruptcy becomes a real possibility?

The story so farEven after the financial crisis, J.C. Penney was in decent shape. At the beginning of 2011, the company was profitable and sales were growing. The balance sheet looked fine, with cash almost completely covering the company's debt, and while margins weren't as high as they used to be, things were improving.

Johnson took over as CEO in late 2011, implementing a new strategy to shake things up. Discounts and coupons were replaced with everyday low prices, which drove loyal customers away and caused massive sales declines. Johnson was fired in 2013, and the company 🦂is still struggling to recover.

The balance sheet has taken quite🍸 a hit over the past few years:

A🧔ll values in billions USD. Source: J.C. Penney earnings reports.

A reasonable net debt of less than $500 million has ballooned to more than $4 billion, and the company's book value has declined by nearly two-thirds. With losses continuing to pile up, the situation will only get worse before it gets better.

With over $1 billion of cash, it may seem as if J.C. Penney isn't in all that much trouble. But there's a simple way to quantify the company's bankruptcy risk: the Altman Z-Score. It's a single number calculated from figures on a company's balance sheet and income statement, and it has proved ꧟to be fairly accurate over the years as a predictor of bankruptcy. Any Z-Score below 1.81 means a company is distressed, and bankruptcy in the next few years is likely.

Here's how J.C. Penney's Altman Z-Score has changed over the past few years:

Calculatio⛄ns by author. Data from J.C. Penney annual reports.

J.C Penney's Z-Score became distressed in 2012, and while there was some improvement in 2014 compared with 2013, it remains distressed today. That doesn't mean bankruptcy is guaranteed, as the Altman Z-Score is far from perfect, but it does show that J.C. Penney's financial situation is tenuous at best.

Time is running outJ.C. Penney managed to report positive free cash flow in 2014 despite a net loss of $771 million, allowing the company to maintain over $2 billion of liquidity. This situation buys J.C. Penney some time, but the way the company is saving cash isn't sustainable. J.C. Penney is underspending on capital expenditures, committing just $252 million in 2014, compared with a depreciation charge of $632 million. This approach can continue for a while, but the company is really only delaying its capital spending.

J.C. Penney is also allowing inventory to decline, freeing up some much-needed cash. Again, this isn't sustainable in the long run, and eventually inventory will start increasing again, especially as sales grow.

After another year or two, neither of these methods will be possible any longer, and the company's liquidity is going to start declining again if profitability hasn't returned. That's a tall order, especially given the $400 million in annual interest payments, and if J.C. Penney is still losing hundreds of millions of dollars per year at that time, bankruptcy begins to look increasingly likely.

Betting on a J.C. Penney turnaround remains extremely risky, and a better investment may be fellow department store Kohl's (NYSE: KSS). While Kohl's has had some issues with declining sales and profits over the past few years, the company is still extremely profitable, and share buybacks are driving per-share earnings higher.

During the holiday quarter, Kohl's managed to grow same-store sales by 3.7%, only slightly slower than J.C. Penney's 4.4% increase. That showing comes even as J.C. Penney grew its sales from a depressed base, and it shows that J.C. Penney is going to have a difficult time winning market share from its competitors.

Kohl's stock has run up a bit recently, but the stock is still reasonably priced. Based on 2014 earnings, the stock has a P/E ratio of about 16.7, and analysts expect earnings to grow significantly over the next few years, reaching $5 per share in 2016 compared with $4.24 per share in 2014.

Kohl's is a far less risky investment than J.C. Penney, which is running out of time to return to profitability. The company's steps to preserve liquidity have worked so far, but J.C. Penney will be in serious trouble if vast improvements in profitability aren't realized in the next couple of years. There's no short-term risk of bankruptcy, but the clock is ticking.

Timothy Green has no position in any stocks mentioned.