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 | 0.9% | -2.5% | -0.4% | -5.2% | -7.1% | -1.5% | -3.7% | 1.3% |
| 1 month | -5.4% | -8.8% | 10.9% | -9.6% | -20.7% | -4.2% | -2.8% | -1.2% |
| 3 months | -9.4% | -9.3% | 13.8% | -21.4% | -27.5% | -5.3% | -0.9% | -3.5% |
| 6 months | -10.1% | -10.7% | -11.2% | -26.8% | -30.1% | -13.8% | 23.2% | -2.3% |
| 1 year | -21.9% | -14.9% | -13.2% | -17.7% | -35.9% | -20.3% | -5.4% | 3.4% |
| 2 years | -35.1% | -25.5% | 10.4% | -46.9% | -53.2% | -39.8% | 2.2% | -3.8% |
| Annualised | 1.0% | -1.9% | -8.9% | -5.4% | -18.7% | -16.8% | 6.6% | |
| Risks | ||||||||
| Max Drawdown | -37.5% | -38.3% | -52.7% | -57.8% | -60.5% | -52.9% | -35.8% | |
| Avg Holdings | 24.8 | 24.9 | 24.9 | 25 | 25 | 25 | 25 | |
| Diversification | Good | Good | Good | Good | Good | Good | Good | |
