What is the Altman Z-score?
Developed by Edward Altman in 1968, the Z-score is one of the best-known bankruptcy prediction models. It uses data from the [balance sheet](/glossary/balance-sheet) and [income statement](/glossary/income-statement) to give a single score of financial health.
Original formula (public manufacturing companies)
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
- A = [Working capital](/glossary/working-capital) ÷ Total assets
- B = [Retained earnings](/glossary/retained-earnings) ÷ Total assets
- C = EBIT ÷ Total assets
- D = Market value of equity ÷ Total liabilities
- E = Sales ÷ Total assets
Interpreting the score
- Above 2.99: safe zone
- 1.81 to 2.99: grey zone
- Below 1.81: distress zone, with a higher risk of bankruptcy
Variants
- Z' (private companies): uses book value of equity instead of market value, with adjusted weights.
- Z'' (non-manufacturing and emerging markets): drops the sales/assets ratio and uses different thresholds.
Example
A company has A = 0.15, B = 0.20, C = 0.10, D = 1.0, E = 1.2.
Z = 0.18 + 0.28 + 0.33 + 0.60 + 1.20 = 2.59, which is in the grey zone.
Limitations
The Z-score is a screening tool, not a verdict. It can be distorted by unusual accounting, industry differences or one-off events. Use it alongside cash flow, [solvency](/glossary/solvency) and [going concern](/glossary/going-concern) analysis.