What is the Altman Z-Score?
The Altman Z-Score is a financial model developed by Professor Edward Altman in 1968 to predict the probability of a company going bankrupt within two years. It combines five financial ratios into a single weighted score using discriminant analysis. It is widely used by credit analysts, lenders, and investors to assess corporate financial health. See also our Current Ratio Calculator.
How is the Altman Z-Score calculated?
The original public company formula is: Z = 1.2×X1 + 1.4×X2 + 3.3×X3 + 0.6×X4 + 1.0×X5, where X1 = Working Capital/Total Assets, X2 = Retained Earnings/Total Assets, X3 = EBIT/Total Assets, X4 = Market Value of Equity/Total Liabilities, and X5 = Net Sales/Total Assets. Revised coefficients are used for private and non-manufacturing companies.
What is a good Altman Z-Score?
For public manufacturing companies, a Z-Score above 2.99 is considered the Safe Zone (low bankruptcy risk), scores between 1.81 and 2.99 fall in the Grey Zone (uncertain), and scores below 1.81 indicate the Distress Zone (high bankruptcy risk). Thresholds differ slightly for private and non-manufacturing models.
Can the Altman Z-Score be negative?
Yes. If a company has very negative retained earnings or EBIT (i.e., large accumulated losses or operating losses), the Z-Score can be negative. A negative score strongly indicates financial distress and a high probability of bankruptcy.
What is EBIT and why is it used in the Z-Score?
EBIT stands for Earnings Before Interest and Taxes — it measures a company's core operating profitability before financing costs and taxes. It is used in the Z-Score because it reflects how efficiently a company generates profit from its assets, independent of its capital structure or tax jurisdiction.
Which Altman Z-Score model should I use for private companies?
For private (non-publicly traded) companies, Altman developed a revised model (Z') that replaces market value of equity with book value of equity and adjusts the coefficients. The thresholds also shift: above 2.9 is Safe Zone, below 1.23 is Distress Zone. This calculator automatically applies the correct model based on your company type selection.
What are the limitations of the Altman Z-Score?
The Z-Score was originally calibrated on manufacturing companies in the 1960s, so it may be less accurate for financial institutions, startups, or heavily asset-light businesses. It is backward-looking (based on historical financial statements), does not account for qualitative factors like management quality or industry trends, and should be used alongside other credit analysis tools.