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 | 2.8% | 3.1% | 0.5% | -0.1% | -2.9% | -1.5% | -0.7% | -0.7% |
| 1 month | 5.1% | 26.0% | 0.6% | 13.6% | -3.8% | -1.4% | 2.7% | -1.1% |
| 3 months | -1.3% | 18.6% | 2.3% | -1.4% | -1.5% | -3.9% | 18.8% | -2.4% |
| 6 months | 2.4% | 12.5% | 2.1% | -16.7% | -17.9% | -2.6% | 11.1% | 4.8% |
| 1 year | -6.6% | 6.4% | 21.0% | -15.5% | -14.7% | -7.7% | 20.1% | 3.6% |
| 2 years | 18.3% | 30.1% | -8.8% | 3.7% | -25.3% | -19.9% | 11.4% | 10.7% |
| Annualised | 6.2% | 4.5% | -6.1% | 11.3% | -7.8% | -9.5% | 15.0% | |
| Risks | ||||||||
| Max Drawdown | -26.4% | -38.2% | -44.7% | -41.7% | -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 | |
