It's an ugly time for the ravaged retail industry. And while investors shouldn't completely avoid the entire sector, they should definitely be extremely discriminating when it comes to the stocks they invest their hard-earned cash in. There are a lot of sick retailers out there, and many of them are going to be winnowed out as the economy continues to sink.

I was recently called out by some Foolish readers for too often using Talbots (NYSE:TLB) and Borders as examples of debt-heavy, beleaguered businesses whose stocks investors should avoid. Come to think of it, yes, I have called out these stocks many, many times; they just seemed like good examples of stocks that we may have to kiss goodbye in the ugly economic climate.

Point well taken, though -- let's take a look around for some other retailers that are having a tough time staggering through the current economic crisis.

Scary stocks abound
In good times, ailing businesses can mask their problems. When times are terrible, though, the weak are weeded out, and the current economic climate has reminded us all why too much debt is dangerous for corporations as well as consumers. Based on several metrics, I've accumulated a list of retail stocks I think investors should think twice about.

Company

Debt/Equity

Earnings from continuing operations Margin

Quick Ratio

Rite-Aid (NYSE:RAD)

571.3%

(6%)

0.3

Dillards (NYSE:DDS)

61.3%

(0.6%)

0.1

Bon-Ton (NASDAQ:BONT)

465.3%

(0.2%)

0.0

Saks (NYSE:SKS)

59.1%

(0.5%)

0.0

Pier 1 (NYSE:PIR)

107.2%

(6.3%)

0.5

*All data from Capital IQ as of Jan. 15, 2009. Figures reflect trailing 12 month data.

Granted, these are priced in penny-stock territory now, but investors shouldn't let the "low" prices fool them -- these companies have deep troubles to contend with, not least of which is the fact that they've got way too much debt. (Read up on these terms in "How to Read a Balance Sheet: Current and Quick Ratios," "Using the Debt-to-Equity Ratio," and "Foolish Fundamentals: Margins.")

Rite-Aid competes not only with strong pure-play drug store rivals, but also with supermarkets and discounters. That was plenty of competition even when times were better; can this struggling company make it through when times are this tough? I'd be skeptical. Check out its crazy high debt-to-equity ratio, too. Meanwhile, a quick ratio under 1.0 is generally a red flag for investors.

We've already heard department store companies are suffering, and Saks, Dillards and Bon-Ton appear to be in particularly rough shape. And Pier 1 has been struggling for years, but one might wonder if this deep and ugly recession will finally sound the death knell, much as it recently did for long-suffering KB Toys.

All of these companies aren't turning a profit in the last 12 months (Pier 1 hasn't made an annual profit since 2005), and note that none of these can cover their interest expenses with operating income from continuing operations in the last 12 months. Ouch.

Cash is still king
The current financial crisis has really made me think a great strategy for investors is to seek out very high-quality companies with plenty of cash and very little or no debt. Even if those companies are pressured by the current economic storm and suffer near-term drops in profitability, they still have the means to weather the storm, and maybe even make strategic acquisitions.

For example, even though Google (NASDAQ:GOOG) has lost some of its luster recently, and it stands to reason that its advertising business will take a hit in such bad times, the 51% decrease in its stock price and a price-to-earnings ratio of 18 -- and this is a tech company -- make it look increasingly cheap for long-term investors. Meanwhile, remember, Google has a ton of cash -- $14.4 billion, or $45.80 per share -- and no debt.

Don't get depressed, look for opportunities
I know I'm being a bit of a prophet of doom, but unfortunately, with a serious economic correction needed after such a massive debt-fueled bubble, it's simply inevitable that the retail industry's going to get ravaged. This is part of the economic cycle, although it's admittedly not very pleasant.

On the other hand, it stands to reason that investors who choose companies that survive and pick up the remaining market share will end up with some pretty nice gains in their portfolios. So beyond the dark clouds and violent storminess that's currently at work, there's a silver lining.

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Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.