Altman Z-Score
Altman Z-Score
A weighted combination of five financial ratios designed to predict bankruptcy risk for public manufacturers. Originally developed by Edward Altman in 1968 and remarkably durable as a distress indicator.
When to use: Use as a quick distress screen for public industrial firms. Z > 2.99 = "safe" zone; 1.81 ≤ Z ≤ 2.99 = "grey" zone (warrant scrutiny); Z < 1.81 = "distress" zone (significantly elevated bankruptcy risk over the next 1–2 years). Less reliable for non-manufacturers, financials, and private firms.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| Z | Altman Z-Score | Composite distress score; >2.99 safe, 1.81–2.99 grey zone, <1.81 distressed | integer |
| WCap | Working Capital | Current assets − current liabilities | $ |
| RetEarn | Retained Earnings | Retained earnings on the balance sheet | $ |
| EBIT | EBIT | Earnings before interest and taxes (operating income) | $ |
| MarketCapZ | Market Cap (Equity) | Market value of equity (price × shares outstanding) | $ |
| TotalLiabilities | Total Liabilities | All liabilities, including payables and interest-bearing debt | $ |
| Sales | Annual Sales | Annual revenue (net sales) | $ |
| TotalAssets | Total Assets | Total assets on the balance sheet | $ |
Real-Life Examples
Example 1: Healthy Mid-Cap
WC $200M, RetEarn $400M, EBIT $150M, MarketCap $1,500M, TotalLiabilities $400M, Sales $1,000M, TotalAssets $1,200M.
Given
Step-by-Step
For these inputs, Altman Z-Score is 4.162500 under the stated payment, compounding and accounting assumptions.
Example 2: Distressed Firm
WC −$50M, RetEarn $100M, EBIT $30M, MarketCap $200M, TotalLiabilities $600M, Sales $800M, TotalAssets $900M.
Given
Step-by-Step
For these inputs, Altman Z-Score is 1.287778 under the stated payment, compounding and accounting assumptions.
Frequently Asked Questions
Altman fit a discriminant-analysis model on a sample of 33 bankrupt and 33 non-bankrupt public manufacturers from 1946–1965. The five ratios and weights minimize Type I and Type II misclassification on that sample. Decades of out-of-sample testing have validated its surprising durability.
The original model is tuned for public manufacturers. Altman published modified versions: Z' (private firms) and Z'' (non-manufacturers and emerging markets). The principle is the same; coefficients differ. This calculator implements the original (public manufacturers).
A low Z-score means elevated probability of distress, not certainty of bankruptcy. Many "distress zone" firms recover; many "safe zone" firms eventually fail (especially after fraud or industry shifts). Use as a flag for deeper analysis, not as a final answer.