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 | -2.0% | -1.6% | -8.9% | -6.5% | 2.7% | -1.2% | 0.8% | 1.2% |
| 1 month | -7.6% | -10.6% | -17.5% | -15.6% | -11.1% | -4.4% | -14.8% | 2.0% |
| 3 months | -6.0% | -6.3% | -10.0% | 0.5% | -9.5% | -6.5% | -12.8% | 0.6% |
| 6 months | -13.3% | -21.3% | -31.5% | -8.3% | -30.1% | -17.1% | -26.1% | 3.0% |
| 1 year | -29.2% | -30.4% | -39.9% | 32.8% | -49.7% | -17.2% | -2.2% | 7.2% |
| 2 years | 34.8% | 34.8% | 13.5% | 103.5% | 13.4% | 22.4% | 120.1% | 25.7% |
| Annualised | 5.8% | 2.9% | -3.0% | 4.4% | -6.8% | -8.4% | 14.2% | |
| Risks | ||||||||
| Max Drawdown | -56.3% | -51.0% | -55.2% | -69.4% | -69.5% | -67.1% | -64.6% | |
| Avg Holdings | 25 | 25 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
