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 | -1.4% | -4.2% | 6.8% | -2.6% | 4.6% | 1.2% | -0.9% | 2.3% |
| 1 month | 0.1% | -2.8% | 7.4% | -16.5% | 12.9% | 1.7% | -4.0% | 5.0% |
| 3 months | 2.1% | -4.1% | 5.5% | -15.3% | 1.0% | -0.3% | -20.5% | 2.8% |
| 6 months | -11.2% | -21.3% | -1.3% | -28.6% | -20.4% | -20.6% | -24.8% | -3.5% |
| 1 year | -10.1% | -15.3% | 1.0% | -44.3% | -35.4% | -21.2% | -16.8% | 0.0% |
| 2 years | -11.9% | -18.5% | -2.8% | -38.1% | -46.3% | -36.9% | -13.8% | -1.0% |
| Annualised | 4.0% | -1.1% | -5.8% | -3.1% | -14.2% | -14.9% | 1.5% | |
| Risks | ||||||||
| Max Drawdown | -28.1% | -38.2% | -46.5% | -53.1% | -58.5% | -47.9% | -32.5% | |
| Avg Holdings | 24.8 | 24.9 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
