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Altman Z-Score

Calculate a company's Altman Z-Score to predict its probability of bankruptcy within two years.

Model selection

Original 5-factor model for publicly traded manufacturing firms using Market Value of Equity.

Balance sheet figures

$
$
$
$
$
$

Income statement figures

$
$

Altman Z-Score

3.61

Safe Zone (Z > 2.99)

Distress evaluationSafe Zone (Z > 2.99)

The company is in good financial health with a very low probability of bankruptcy within two years.

Distress Zone

Z < 1.81

Grey Zone

1.81 – 2.99

Safe Zone

Z > 2.99

Working capital (CA − CL)

$2,500,000.00

X₁ ratio: 0.2500

EBIT / Total assets

0.1500

Operating return: 15.0%

Equity / Liabilities

2.0000

Solvency multiple: 2.0000×

Sales / Total assets

1.2000

Asset turnover: 1.2000×

Positive component score breakdown

Total points3.6138
  • X₁: Liquidity (Working Capital)0.3000 pts8.3%
  • X₂: Cumulative Profit (Retained Earnings)0.4200 pts11.6%
  • X₃: Operating Productivity (EBIT)0.4950 pts13.7%
  • X₄: Solvency (Equity / Liabilities)1.2000 pts33.2%
  • X₅: Asset Turnover (Sales)1.1988 pts33.2%

How the Z-Score is calculated

Step-by-step discriminant formula breakdown for the Public Manufacturing (Original 1968 Z-Score).

  1. Step 1: Compute liquidity and balance sheet ratios

    X1=Current Assets−Current LiabilitiesTotal Assets,X2=Retained EarningsTotal AssetsX_1 = \frac{\text{Current Assets} - \text{Current Liabilities}}{\text{Total Assets}}, \quad X_2 = \frac{\text{Retained Earnings}}{\text{Total Assets}}

    Working capital is $2,500,000.00 ($4,000,000.00 − $1,500,000.00), yielding X₁ = 0.2500. Retained earnings of $3,000,000.00 over total assets of $10,000,000.00 yields X₂ = 0.3000.

  2. Step 2: Compute operating profitability and leverage ratios

    X3=EBITTotal Assets,X4=EquityTotal LiabilitiesX_3 = \frac{\text{EBIT}}{\text{Total Assets}}, \quad X_4 = \frac{\text{Equity}}{\text{Total Liabilities}}

    EBIT of $1,500,000.00 divided by total assets of $10,000,000.00 yields X₃ = 0.1500. Equity of $8,000,000.00 divided by total liabilities of $4,000,000.00 yields X₄ = 2.0000.

  3. Step 3: Compute asset turnover ratio

    X5=SalesTotal AssetsX_5 = \frac{\text{Sales}}{\text{Total Assets}}

    Total sales of $12,000,000.00 divided by total assets of $10,000,000.00 yields an asset turnover ratio of X₅ = 1.2000.

  4. Step 4: Apply model weights and sum

    Z=1.2X1+1.4X2+3.3X3+0.6X4+0.999X5Z = 1.2 X_1 + 1.4 X_2 + 3.3 X_3 + 0.6 X_4 + 0.999 X_5

    Z = (1.2 × 0.2500) + (1.4 × 0.3000) + (3.3 × 0.1500) + (0.6 × 2.0000) + (0.999 × 1.2000) = 0.3000 + 0.4200 + 0.4950 + 1.2000 + 1.1988 = 3.61.

The Altman Z-Score is an empirical financial distress screening model developed by Dr. Edward I. Altman. It is intended for non-financial operating businesses and is not calibrated for banks, insurance carriers, or financial institutions. Input figures should reflect consistent trailing twelve-month or fiscal year-end financial statement filings.
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What is the Altman Z-Score?

The Altman Z-Score is a quantitative formula developed in 1968 by NYU Stern Finance Professor Dr. Edward I. Altman to predict the likelihood that a company will enter bankruptcy within two years. Combining five fundamental financial ratios through multiple discriminant analysis, the model gauges liquidity, cumulative profitability, operating efficiency, financial leverage, and asset turnover.

Corporate credit analysis requires examining both short-term solvency and structural distress. While the acid test ratio calculator evaluates immediate liquidity and cash buffers, the Altman Z-Score assesses balance sheet resilience over a multi-year horizon. Analysts frequently pair the Z-Score with the accrual ratio calculator to confirm that reported accounting profits reflect genuine cash inflows rather than aggressive non-cash accruals. When companies face high borrowing burdens, understanding their after-tax cost of debt and estimating growth funding via the additional funds needed calculator helps determine if distress is cyclical or structural.

The three Altman Z-Score models

Altman developed three distinct variations of the Z-Score to evaluate different corporate structures accurately:

1. Original 1968 model (Public manufacturing)

Designed for publicly traded manufacturing firms, this baseline model incorporates market equity valuation into its leverage ratio:

Z=1.2X1+1.4X2+3.3X3+0.6X4+0.999X5Z = 1.2 X_1 + 1.4 X_2 + 3.3 X_3 + 0.6 X_4 + 0.999 X_5

2. 1983 Model A / Z'-Score (Private manufacturing)

Because private companies lack publicly quoted share prices, Altman replaced market capitalization with book value of equity and recalibrated all statistical coefficients:

Z′=0.717X1+0.847X2+3.107X3+0.420X4+0.998X5Z' = 0.717 X_1 + 0.847 X_2 + 3.107 X_3 + 0.420 X_4 + 0.998 X_5

3. 1993/2000 Model B / Z''-Score (Non-manufacturing and service firms)

Asset turnover varies drastically between capital-intensive manufacturers and service or tech enterprises. Altman eliminated the sales-to-assets ratio (X5X_5) to minimize industry bias, creating a universal 4-factor scoring model:

Z′′=6.56X1+3.26X2+6.72X3+1.05X4Z'' = 6.56 X_1 + 3.26 X_2 + 6.72 X_3 + 1.05 X_4

Ratio definitions and component weighting

Each variable in the model isolates a distinct pillar of corporate financial strength:

  • X₁ = Working Capital / Total Assets: Measures net liquid assets relative to total enterprise size. Consistent negative working capital signals chronic cash strain.
  • X₂ = Retained Earnings / Total Assets: Reflects cumulative historical profitability and reinvestment. Younger firms often score lower here than mature businesses.
  • X₃ = EBIT / Total Assets: Measures operating productivity unburdened by tax strategies and interest expense. This is the single heaviest weighted component in the original formula.
  • X₄ = Equity / Total Liabilities: Compares equity cushion (market cap for public firms, book net worth for private firms) to total debt. It shows how far enterprise asset values can drop before liabilities exceed assets.
  • X₅ = Sales / Total Assets: Measures asset turnover and management efficiency in generating top-line revenue from corporate resources.

Zones of discrimination and score interpretation

The resulting score places the evaluated company into one of three distinct credit zones:

Model variantSafe Zone (Low risk)Grey Zone (Caution)Distress Zone (High risk)
Public manufacturing (Z)Z > 2.991.81 ≤ Z ≤ 2.99Z < 1.81
Private manufacturing (Z')Z' > 2.901.23 ≤ Z' ≤ 2.90Z' < 1.23
Non-manufacturing (Z'')Z'' > 2.601.10 ≤ Z'' ≤ 2.60Z'' < 1.10

Published worked example

Consider an industrial manufacturer with the following balance sheet and income statement metrics:

  • Total assets: $10,000,000
  • Current assets: $4,000,000
  • Current liabilities: $1,500,000 (Working Capital = $2,500,000)
  • Retained earnings: $3,000,000
  • EBIT: $1,500,000
  • Total liabilities: $4,000,000
  • Market value of equity: $8,000,000
  • Total revenue (Sales): $12,000,000

Computing the five sub-ratios yields:

X1=$2,500,000$10,000,000=0.25,X2=$3,000,000$10,000,000=0.30,X3=$1,500,000$10,000,000=0.15X_1 = \frac{\$2{,}500{,}000}{\$10{,}000{,}000} = 0.25, \quad X_2 = \frac{\$3{,}000{,}000}{\$10{,}000{,}000} = 0.30, \quad X_3 = \frac{\$1{,}500{,}000}{\$10{,}000{,}000} = 0.15
X4=$8,000,000$4,000,000=2.00,X5=$12,000,000$10,000,000=1.20X_4 = \frac{\$8{,}000{,}000}{\$4{,}000{,}000} = 2.00, \quad X_5 = \frac{\$12{,}000{,}000}{\$10{,}000{,}000} = 1.20

Applying the original 1968 model weights gives:

Z=1.2(0.25)+1.4(0.30)+3.3(0.15)+0.6(2.00)+0.999(1.20)Z = 1.2(0.25) + 1.4(0.30) + 3.3(0.15) + 0.6(2.00) + 0.999(1.20)
Z=0.300+0.420+0.495+1.200+1.1988=3.61Z = 0.300 + 0.420 + 0.495 + 1.200 + 1.1988 = 3.61

Because 3.61 exceeds the 2.99 threshold, the company falls firmly in the Safe Zone, signifying low bankruptcy probability over the next 24 months.

Frequently asked questions

What is a good Altman Z-Score?
For public manufacturing companies, a score above 2.99 indicates a safe financial profile. For private manufacturing firms, scores above 2.90 are considered safe, while for private non-manufacturing firms, scores above 2.60 denote solid financial health. Higher scores indicate lower bankruptcy probability.
Can the Altman Z-Score be used for banks and financial institutions?
No. The Altman Z-Score was designed for operating commercial enterprises. Financial institutions like commercial banks, credit unions, and insurance companies hold vastly different balance sheet structures with high leverage and specialized statutory capital requirements.
What is the difference between Z, Z prime, and Z double prime?
The original Z-score was created for public manufacturers and uses market capitalization for equity. The Z'-Score (Z prime) is for private manufacturers and uses book value of equity. The Z''-Score (Z double prime) eliminates the sales-to-assets ratio to evaluate service, tech, and non-manufacturing companies without turnover distortion.
How accurate is the Altman Z-Score in predicting bankruptcy?
In empirical academic studies and historical backtests, the Altman Z-Score demonstrated roughly 70% to 90% accuracy in predicting corporate bankruptcy within one to two years prior to failure. However, it is an empirical screening metric and should be combined with qualitative analysis, cash flow reviews, and macro conditions.
Can a company recover from the distress zone?
Yes. Being in the distress zone means probability of insolvency is elevated, not guaranteed. Companies frequently emerge from the distress zone by raising fresh equity, restructuring high-interest liabilities, divesting unprofitable divisions, or improving working capital efficiency.
Does this calculator transmit sensitive financial data?
No. All calculations run strictly in your web browser. Input values update your browser address bar URL so you can save or share scenarios without sending financial statement data to any remote server.

Resources and references

The formulas and methods in this calculator were checked against these independent sources.