The Altman Z-Score is a checklist for identifying stocks that might be at risk of bankruptcy. It was created by US finance Professor Edward Altman and detailed in a book he co-authored, called Managing Credit Risk. The Z-Score is a red flag indicator that can be used as a short selling strategy. It analyses five weighted business ratios to estimate the likelihood of financial distress. Broadly, these checks examine a company's asset, strength, profitability, solvency, efficiency and ability to generate earnings. Altman wrote: "The detection of company operating and financial difficulties is a subject which has been particularly amenable to analysis with financial ratios." Tests over 31 years to 1999 found the Z-Score to be 80-90% accurate in predicting bankruptcy one year prior to the event. The Z-Score is one of the components used in another short selling strategy: James Montier Trinity of Risk.
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Professor of Finance at NYU Stern School of Business. Best known for the development of the Z-Score.
Managing Credit Risk: The Great Challenge for Global Financial Markets
by John B. Caouette, Edward I. Altman, Paul Narayanan, Robert Nimmo
Its initial test by Altman found that it was 72% accurate in predicting bankruptcy two years prior to the event, while subsequent examination has shown 80-90% accuracy.
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| Returns |  |
 |
 |
 |
 |
 |
 |
FTSE 100 |
|---|---|---|---|---|---|---|---|---|
| 1 week | -2.3% | -0.3% | 4.1% | 3.5% | -1.6% | 2.1% | 7.7% | 0.3% |
| 1 month | -15.7% | -11.4% | 8.0% | -19.3% | -3.5% | -7.7% | 9.8% | -3.7% |
| 3 months | -4.4% | 3.5% | 12.2% | -11.6% | -12.4% | -13.3% | 7.9% | -8.5% |
| 6 months | -3.5% | 1.4% | 18.2% | -26.6% | -13.4% | -12.9% | 25.8% | -4.0% |
| 1 year | -17.4% | -10.6% | 24.4% | -34.3% | -25.9% | -20.2% | 18.1% | -6.8% |
| 2 years | -4.7% | 4.4% | -12.1% | -26.9% | -38.9% | -32.3% | 17.2% | 0.4% |
| Annualised | 4.8% | 1.1% | -4.0% | 0.8% | -11.3% | -14.0% | 15.4% | |
| Risks | ||||||||
| Max Drawdown | -26.4% | -38.2% | -44.7% | -51.4% | -39.6% | -41.0% | -25.9% | |
| Avg Holdings | 24.8 | 24.9 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
