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 | 2.5% | -3.4% | -1.5% | -4.4% | -0.6% | -3.1% | -3.4% | -0.3% |
| 1 month | -0.7% | -2.2% | -7.3% | 6.4% | -3.5% | 5.5% | -5.7% | 2.2% |
| 3 months | -7.3% | -10.7% | 4.1% | -2.7% | -30.1% | -2.1% | -10.5% | 2.7% |
| 6 months | -13.1% | -12.6% | -15.9% | -13.0% | -30.8% | -8.9% | 6.7% | -0.3% |
| 1 year | -18.7% | -13.3% | -2.4% | -21.0% | -30.0% | -18.2% | -15.1% | 4.2% |
| 2 years | -34.2% | -27.1% | 5.3% | -47.3% | -55.5% | -37.5% | -16.4% | -1.0% |
| Annualised | 0.6% | -2.4% | -9.5% | -3.9% | -19.7% | -16.3% | 4.2% | |
| Risks | ||||||||
| Max Drawdown | -40.3% | -40.3% | -52.7% | -58.6% | -64.4% | -56.7% | -35.8% | |
| Avg Holdings | 24.8 | 24.9 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
