Altman Z-Score

What is Altman Z-Score?

A credit-strength score combining five financial ratios to estimate a company's risk of bankruptcy within two years, with higher scores indicating lower risk.

Overview

The Altman Z-Score is a credit-strength score that combines several balance sheet and income statement ratios into a single number used to estimate a company's risk of bankruptcy within roughly two years. Higher scores point to lower distress risk; lower scores point to higher risk.

Edward Altman, a finance professor at New York University, published the model in 1968. He used a statistical technique called multiple discriminant analysis on a sample of publicly traded manufacturing companies, half of which had filed for bankruptcy, to find the weighted mix of ratios that best separated the two groups. Altman later published a four-ratio version, usually written Z″ (Z double prime), for non-manufacturing companies.

The score draws on liquidity, accumulated profitability, operating profitability, leverage, and asset efficiency at the same time. That makes it a broader check than any single ratio such as the current ratio or the debt ratio.

Also Known As: Z-Score, Altman Z, Z-Score Bankruptcy Model

Formula

FinSpry calculates the score with one of two models depending on the company's sector. Both share the same first three ratios.

Original Z-Score (Manufacturing and Other Sectors)

Z = 1.2·X1 + 1.4·X2 + 3.3·X3 + 0.6·X4 + 1.0·X5

X4 uses market value of equity

Z″ Score (Non-Manufacturing Sectors)

Z″ = 6.56·X1 + 3.26·X2 + 6.72·X3 + 1.05·X4

X4 uses book value of equity; there is no X5

Formula Components:

X1: Working capital (current assets minus current liabilities) ÷ total assets. A liquidity measure.
X2: Retained earnings ÷ total assets. Reflects cumulative profitability and, indirectly, company age.
X3: EBIT ÷ total assets. Operating profitability before interest and taxes.
X4 (original Z): Market capitalization ÷ total liabilities. How far equity value could fall before liabilities exceed it.
X4 (Z″): Book shareholders' equity ÷ total liabilities.
X5 (original Z only): Revenue ÷ total assets, also called the asset turnover ratio.

How FinSpry applies it: Companies in the Financial Services, Real Estate, Technology, Communication Services, Utilities, and Healthcare sectors are scored with Z″. All other stocks are scored with the original Z. Balance sheet inputs come from the most recent reported balance sheet, while EBIT and revenue are trailing twelve-month figures. If any required input is missing, FinSpry shows no score rather than filling the gap with zero.

Some published versions of Z″ add a constant of 3.25 (a variant designed for emerging-market companies). FinSpry does not add that constant, so its Z″ values should be read against the Z″ zones below.

Calculation Example

Consider a hypothetical industrial manufacturer (figures in millions of dollars):

Company Financial Data:

Total Assets	$2,000
Current Assets	$700
Current Liabilities	$400
Retained Earnings	$500
EBIT (trailing twelve months)	$200
Market Capitalization	$1,800
Total Liabilities	$1,200
Revenue (trailing twelve months)	$2,400

Step 1: Calculate the Ratios

X1 = ($700 − $400) ÷ $2,000 = 0.15

X2 = $500 ÷ $2,000 = 0.25

X3 = $200 ÷ $2,000 = 0.10

X4 = $1,800 ÷ $1,200 = 1.50

X5 = $2,400 ÷ $2,000 = 1.20

Step 2: Apply the Weights

Z = 1.2(0.15) + 1.4(0.25) + 3.3(0.10) + 0.6(1.50) + 1.0(1.20)

Z = 0.18 + 0.35 + 0.33 + 0.90 + 1.20

= 2.96

Result: A Z-Score of 2.96 sits just inside the grey zone (1.81 to 2.99) for the original model. The company is not flagged as distressed, but it also lacks the margin of safety of a score above 2.99. A modest rise in EBIT or a lower debt load would move it into the safe zone.

Same Figures Under Z″:

Book equity = $2,000 − $1,200 = $800, so X4 = $800 ÷ $1,200 ≈ 0.667

Z″ = 6.56(0.15) + 3.26(0.25) + 6.72(0.10) + 1.05(0.667)

Z″ = 0.984 + 0.815 + 0.672 + 0.700 = 3.17

If this were a technology company, its score would be 3.17, above the Z″ safe threshold of 2.6. The two models use different scales, so a Z of 2.96 and a Z″ of 3.17 cannot be compared directly.

How to Interpret

Altman defined three zones for each model. The cut-offs below are the ones FinSpry uses for its two variants.

Original Z-Score Zones:

Safe Zone (Above 2.99)

The ratio profile resembles companies that did not go bankrupt in Altman's sample. Near-term distress risk is considered low.

Grey Zone (1.81 to 2.99)

Mixed signals. The model cannot classify the company with confidence, so the balance sheet and cash flow deserve a closer look.

Distress Zone (Below 1.81)

The ratio profile resembles companies that later failed. It is a warning sign, not a prediction that bankruptcy will happen.

Z″ Score Zones:

Safe Zone (Above 2.6)

Low estimated distress risk for a non-manufacturing company.

Grey Zone (1.1 to 2.6)

Inconclusive; further analysis of leverage and profitability is warranted.

Distress Zone (Below 1.1)

Elevated estimated distress risk.

Reading the Score Well:

Look at the trend over several periods; a falling score can matter more than a single reading
Check which component drives a low score, such as negative retained earnings or thin working capital
Pair it with the Piotroski F-Score, which tracks year-over-year improvement rather than distress
Review the interest coverage ratio to see whether operating profit comfortably covers interest costs

Limitations

Calibrated on older data: The original weights come from a 1960s sample of manufacturers. Business models, accounting rules, and capital structures have changed since.
Banks and insurers: Financial companies have balance sheets built on leverage and lack a meaningful working capital figure, so even Z″ is a rough fit for them.
Market swings in X4: In the original model, a falling share price lowers the score even if the business is unchanged.
Buybacks and retained earnings: Companies that return large amounts of capital or carry accumulated deficits can show low X2 values despite healthy cash generation.
Backward-looking: The inputs are reported figures. Sudden events such as lawsuits, lost contracts, or refinancing problems will not show up until later filings.
Not comparable across models: A Z score and a Z″ score use different scales and zone cut-offs.

Related Financial Ratios

These related measures help explain what drives a company's Z-Score:

Piotroski F-Score

A 0 to 9 score built from nine pass or fail tests of profitability, leverage, liquidity, and efficiency.

Net Working Capital

Current assets minus current liabilities, the numerator of X1.

Asset Turnover Ratio

Revenue relative to total assets, which forms X5 in the original model.

Debt-to-Equity Ratio

Compares debt with shareholders' equity, a direct view of the leverage captured by X4.

Interest Coverage Ratio

Measures how many times operating profit covers interest expense.

Use This Metric

Filter stocks by Altman Z-Score on the Financial Health tab of the stock screener to compare distress risk across companies.

Screen by Altman Z-Score

How much leverage is on the balance sheet?

Explore all Debt & Solvency Ratios

Back to Glossary