Before the credit crisis struck in 2008, corporate bankruptcy was the last thing on investors’ minds. It was easy for companies to raise cash at will.
However, over the past three years, times have changed considerably. The number of companies announcing downward revisions to their future growth estimates has increased. Those that are seeing rising pressure on their balance sheets can also be found in plenty.
This means that out-of-favour investment measures, such as Edward Altman’s Z scores (or Altman Z-Score), are being dusted down.
What’s Altman Z?
This system was originally devised in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. He framed this score to warn investors about firms at risk of going bankrupt. Over the years, it has also been used to help investors find the companies that are best able to withstand bankruptcy.
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