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 | -1.6% | 1.1% | 0.8% | -4.4% | -2.7% | 1.7% | -6.2% | 0.9% |
| 1 month | -4.9% | 0.0% | 3.4% | -14.7% | 18.5% | -0.3% | -9.2% | -5.1% |
| 3 months | -5.0% | 0.4% | -15.2% | -18.4% | 17.2% | 0.1% | 225.2% | -2.8% |
| 6 months | -15.9% | 0.6% | -4.4% | -10.4% | 22.3% | -11.1% | 256.4% | -0.7% |
| 1 year | -25.2% | -26.4% | -11.0% | -34.4% | -5.5% | -29.8% | 162.5% | -5.9% |
| 2 years | -30.4% | -18.6% | 10.1% | -43.6% | -20.7% | -35.4% | 218.1% | -3.4% |
| Annualised | 1.5% | -0.5% | -6.9% | -4.7% | -7.5% | -15.9% | 46.6% | |
| Risks | ||||||||
| Max Drawdown | -33.9% | -38.2% | -46.5% | -56.4% | -58.5% | -51.8% | -35.8% | |
| Avg Holdings | 24.8 | 24.9 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
