Combining Altman Z-Score Risk Screening with Low Price-to-Book Selection

Summary

The document introduces Altman's Z-score as a composite financial-risk measure built from five ratios: working capital, retained earnings, earnings before interest and taxes, market equity relative to liabilities, and sales, each scaled against assets except the equity-to-liabilities ratio. It describes score bands for higher risk, an intermediate gray zone, and healthier finances, though the stated healthy category boundary overlaps with the gray-zone threshold. The model was originally developed to assess bankruptcy risk among listed manufacturers and has since been adapted for other company types.

The proposed stock strategy applies the measure to constituents of the CSI 300, removes companies with scores below 1.81, ranks the remaining names by price-to-book, and selects the 50 lowest-ranked for monthly rebalancing. The article reports a negative total strategy return but an upward-moving excess-return curve and annualized excess return of 40% over its stated test period. It provides no detailed results, benchmark specifications, transaction-cost analysis, or robustness checks, so this single reported outcome does not establish investability.

Key ideas

• Altman's Z-score combines five accounting and market-value ratios to assess corporate financial risk.
• The described screen removes CSI 300 constituents with Z-scores below 1.81.
• Among the remaining stocks, the strategy selects the 50 lowest price-to-book names and rebalances monthly.
• The article reports negative total returns alongside positive excess performance during its stated test period.
• The score thresholds and backtest evidence have limitations, including an overlapping category boundary and missing robustness details.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.