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 | 10.2% | 12.9% | 4.9% | -9.8% | 7.9% | 6.7% | -2.0% | 6.2% |
| 1 month | -25.2% | -17.9% | -16.9% | -34.5% | -19.1% | -5.1% | -38.5% | -18.9% |
| 3 months | -18.7% | -14.5% | -28.0% | -29.5% | -13.0% | -17.2% | -46.4% | -27.9% |
| 6 months | -25.9% | -11.8% | -2.8% | -30.8% | -18.6% | -25.8% | -52.7% | -25.8% |
| 1 year | -32.5% | -14.5% | -28.5% | -40.5% | -37.3% | -33.2% | -40.8% | -23.4% |
| 2 years | -41.9% | -20.0% | -15.7% | -51.8% | -51.7% | -50.9% | -51.5% | -21.3% |
| Annualised | -2.2% | -2.6% | -11.9% | -10.8% | -19.4% | -20.9% | -12.9% | |
| Risks | ||||||||
| Max Drawdown | -56.3% | -51.0% | -55.2% | -67.6% | -69.5% | -67.1% | -64.6% | |
| Avg Holdings | 24.8 | 24.9 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
