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 | 4.1% | 2.9% | -5.6% | 0.9% | 0.8% | 0.7% | 2.0% | 2.6% |
| 1 month | 14.0% | 0.9% | -3.2% | -3.6% | -3.1% | 9.6% | 8.1% | 2.8% |
| 3 months | 27.7% | 30.1% | 36.9% | 1.3% | 41.9% | 20.9% | 17.8% | 0.6% |
| 6 months | 54.9% | 57.6% | 93.5% | 18.0% | 68.4% | 27.2% | 35.3% | 14.9% |
| 1 year | 196.2% | 136.5% | 176.1% | 53.4% | 256.6% | 79.5% | 267.1% | 18.4% |
| 2 years | 117.1% | 103.9% | 93.8% | -13.8% | 114.4% | 24.9% | 157.3% | -6.9% |
| Annualised | 10.7% | 9.2% | 4.7% | -0.8% | 8.2% | -6.2% | 20.9% | |
| Risks | ||||||||
| Max Drawdown | -56.3% | -51.0% | -55.2% | -69.4% | -69.5% | -67.1% | -64.6% | |
| Avg Holdings | 24.9 | 25 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
