How Z scores can help you beat the slump

Edward Altman's Z scores were originally devised back in the 1960s to warn investors about firms at risk of going bust – but it can also help you find the stocks best able to withstand the crunch.

Before the credit crunch struck, corporate solvency was the last thing on investors' minds. Cash was easy to come by and consumers were spending freely. Times have changed. Profit warnings in the UK are now at their highest quarterly level since 2001, according to accountancy firm Ernst & Young. Spain has just delivered what Morgan Stanley's Graham Secker describes as Europe's "first large-cap failure in this cycle" with the collapse of property developer Martinsa-Fadesa.

This means that out-of-favour investment measures, such as Edward Altman's Z scores, are being dusted down. The system was originally devised back in the 1960s to warn investors about firms at risk of going bust but it can also help you find the sectors and stocks best able to withstand the crunch. Secker claims that when the Z score is applied across the European market it shows that some sectors contain corporate balance sheets "at their strongest for 20 years" exactly the sorts of stocks that should benefit during the hard times ahead.

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.