Stoxx unveils “strong balance sheet” indices based on Altman Z-Score

Mar 19th, 2014 | By | Category: Equities

Stoxx, a leading European provider of indices, has introduced the Stoxx Strong Balance Sheet Indices, a family of equity indices which select stocks based on the Altman Z-Score.

Stoxx unveils “strong balance sheet” indices based on Altman Z-Score

Professor Edward I. Altman, creator of the Altman Z-Score.

The new indices are designed to act as underlyings for exchange-traded funds (ETFs) and other investable index-linked products.

They are the first to focus on the Altman Z-Score, a quantitative measure for the financial and fundamental health of a company, as a constituent selection criterion for an index concept.

“The Altman Z-Score is an established mathematical measure to determine a company’s financial health. Research has shown that high Altman Z-Scores can serve both as indicator of downturn resilience as well as of outperformance within a market overall,” said Hartmut Graf, Stoxx’s Chief Executive Officer.

The Altman Z-Score was developed in the 1960s by New York University Professor Edward I. Altman, and acts as a measure to gauge a company’s probability to file for bankruptcy. The lower a company’s Z-Score, the more likely it is to default within the next two years. A score of three and more is considered a “safe zone”. The score is calculated using publicly available company fundamental ratios, namely working capital over total asset, retained earnings over total assets, EBIT over total assets, market value equity over total liabilities and sales over total assets.

The index universe for the new indices is the Stoxx Global 1800 Index. Financial companies are excluded due to the flexibility they have with their accounting methods, state ownership and “too big to fail” commitments from governments. To be eligible for inclusion, companies must have a three-year track record of Z-Scores of a minimum of 3.5 and meet minimum liquidity requirements. All companies that pass these screens are included in the indices.

The indices are available in free float market cap and equal weighted versions. Components are subject to a 10% weighting cap. The indices are reviewed annually in September and rebalanced on a quarterly basis. They are calculated in price, net and gross return versions, and are available in Japanese yen, US dollar and euro. Daily historical data is available back to Sept. 24, 2007.

The full index family is as follows:

Stoxx Europe Strong Balance Sheet
Stoxx Europe Strong Balance Sheet Equal Weight
Stoxx Global Strong Balance Sheet
Stoxx Global Strong Balance Sheet Equal Weight
Stoxx USA Strong Balance Sheet
Stoxx USA Strong Balance Sheet Equal Weight
Stoxx Japan Strong Balance Sheet
Stoxx Japan Strong Balance Sheet Equal Weight

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