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 | -0.3% | -1.9% | 0.7% | -4.2% | 4.7% | 3.1% | 3.3% | -0.6% |
| 1 month | 1.2% | -0.8% | 7.5% | -8.2% | 9.0% | 3.9% | 6.0% | 4.8% |
| 3 months | 2.2% | -5.7% | 3.4% | -17.1% | -11.5% | 1.5% | -2.1% | 6.7% |
| 6 months | -5.2% | -10.0% | 6.0% | -23.8% | -15.3% | -0.9% | -13.6% | 4.3% |
| 1 year | -1.9% | -8.4% | 10.4% | -11.0% | -19.2% | -11.8% | 1.6% | 2.8% |
| 2 years | 19.4% | 12.7% | 4.4% | 29.1% | -7.4% | -14.4% | 17.8% | 24.3% |
| Annualised | 6.6% | 1.0% | -6.9% | 12.6% | -6.1% | -8.2% | 9.9% | |
| Risks | ||||||||
| Max Drawdown | -26.4% | -38.2% | -44.7% | -35.2% | -33.9% | -30.3% | -25.9% | |
| Avg Holdings | 24.8 | 24.9 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
Studies based on equal weighted portfolios of max 25 stocks rebalanced quarterly. Qualifying shares below updated daily. Past performance not indicative of future returns.
Please note that 'short selling' strategies are designed to underperform the market - they are best used for hedging long portfolios rather than for absolute negative returns.
