This is a short-selling strategy based on the Altman Z-score which combines five weighted business ratios to estimate the likelihood of financial distress. The idea is that, if the Altman Z-Score is close to or below 3, it is wise to do some serious due diligence.
The Z-score results usually have the following "Zones" of interpretation: any Z-Score above 2.99 is considered to be a safe company. Anything below 1.80 is in the distress zone, with a strong likelihood of the company going bankrupt within the next two years, while anything between 1.80 and 2.99 is in a "grey zone".
In line with Altman's result, this work is based on last annual reported results and does not factor any interim updates.
According to the research, the Altman score does experience false positives (i.e. classifying the firm as bankrupt when it does not go bankrupt) in approximately 15-20% of cases. more »
The Z-Score is a shorthand to describe the financial health of a company, and its likelihood of financial distress. If the Z Score is falling towards 1.8 then it may be a sell signal. Z1 is the Z-Score for manufacturing companies and this version is calculated based using the latest available interim financials.