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Altman Z-Score Calculator

Calculate Altman Z-Score to predict corporate bankruptcy risk. Supports Z, Z', and Z'' models for public, private, and non-manufacturing firms.

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Category Financial Ratios
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Cash, receivables, inventory, short-term investments
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Accounts payable, short-term debt, accrued expenses
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Sum of all assets on the balance sheet
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Cumulative net income minus dividends (can be negative)
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Earnings Before Interest and Taxes (operating income)
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Share price × shares outstanding (or book equity for Z′/Z″)
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Sum of all liabilities (current + long-term)
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Net annual sales / revenue
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About

The Altman Z-Score is a linear discriminant model published by Edward Altman in 1968 that combines five weighted financial ratios to produce a single score predicting the probability of corporate bankruptcy within 2 years. The original model achieved 72% accuracy in predicting bankruptcies two years prior to filing and a Type II error rate below 6%. Misapplying the model - using the public-firm formula on a private company, or ignoring that X4 requires market capitalization rather than book equity - produces meaningless outputs that can mislead credit decisions worth millions. This calculator implements all three Altman variants: the original Z for publicly traded manufacturers, Z′ for private firms (substituting book value of equity for market value), and Z″ for non-manufacturing and emerging-market companies (dropping the asset turnover ratio X5 to remove industry bias). Note: the model assumes going-concern accounting data and performs best on mid-cap manufacturing firms. It does not account for macroeconomic shocks or off-balance-sheet liabilities.

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Formulas

The original Altman Z-Score for publicly traded manufacturing firms:

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

The Z′-Score variant for private firms (replaces market capitalization with book value of equity in X4):

Z′ = 0.717⋅X1 + 0.847⋅X2 + 3.107⋅X3 + 0.420⋅X4 + 0.998⋅X5

The Z″-Score variant for non-manufacturing and emerging-market firms (drops X5 to eliminate industry-specific asset turnover bias, adds intercept 3.25):

Z″ = 6.56⋅X1 + 3.26⋅X2 + 6.72⋅X3 + 1.05⋅X4 + 3.25

Where X1 = Working CapitalTotal Assets, X2 = Retained EarningsTotal Assets, X3 = EBITTotal Assets, X4 = Market Value of EquityTotal Liabilities (or Book Value of Equity for Z′/Z″), X5 = SalesTotal Assets.

Reference Data

VariableRatioZ WeightZ′ WeightZ″ WeightInterpretation
X1Working Capital ÷ Total Assets1.20.7176.56Liquidity relative to asset base
X2Retained Earnings ÷ Total Assets1.40.8473.26Cumulative profitability & firm age
X3EBIT ÷ Total Assets3.33.1076.72Operating efficiency (highest weight)
X4Market Value Equity ÷ Total Liabilities0.60.4201.05Solvency buffer (book value in Z′/Z″)
X5Sales ÷ Total Assets1.00.998 - Asset turnover (excluded in Z″)
Zone Thresholds - Original Z-Score
Safe ZoneZ > 2.99
Grey Zone1.81 ≤ Z ≤ 2.99
Distress ZoneZ < 1.81
Zone Thresholds - Z′-Score (Private Firms)
Safe ZoneZ′ > 2.90
Grey Zone1.23 ≤ Z′ ≤ 2.90
Distress ZoneZ′ < 1.23
Zone Thresholds - Z″-Score (Non-Manufacturing / Emerging)
Safe ZoneZ″ > 2.60
Grey Zone1.10 ≤ Z″ ≤ 2.60
Distress ZoneZ″ < 1.10
Historical Accuracy (Altman, 1968-2000)
1-year prior accuracy95%
2-year prior accuracy72%
Type I error (misclassified bankrupt as safe)6%
Type II error (misclassified safe as bankrupt)15 - 20%

Frequently Asked Questions

The original Z-Score (1968) targets publicly traded manufacturing firms and uses market capitalization for X₄. The Z'-Score (1983) replaces market value with book value of equity, making it applicable to private companies. The Z''-Score (1995) further removes the X₅ (Sales/Total Assets) ratio and adds an intercept constant of 3.25, eliminating industry-specific asset turnover bias for non-manufacturing, service, and emerging-market firms. Each variant has different coefficients and zone thresholds.
Yes. A negative Z-Score occurs when inputs such as working capital or retained earnings are negative - common in firms with accumulated deficits or current liabilities exceeding current assets. A negative score falls deep in the distress zone and indicates severe financial deterioration. For example, a startup burning cash may show X₁ < 0 and X₂ < 0, driving the composite score well below the 1.81 threshold.
Altman's discriminant analysis found that operating profitability relative to the asset base was the strongest single predictor of bankruptcy. The coefficient of 3.3 reflects that firms unable to generate sufficient operating income from deployed assets face the most acute solvency risk. EBIT is used instead of net income to isolate core operational performance from tax jurisdiction and capital structure effects.
Enter the negative value directly. Many young or distressed companies carry accumulated deficits (negative retained earnings). This correctly reduces X₂ and therefore the Z-Score. A firm with retained earnings of −$50M and total assets of $200M yields X₂ = −0.25, which contributes −0.35 to the original Z-Score (1.4 × −0.25). The model was designed to capture this signal.
No. Altman explicitly excluded financial firms (SIC codes 6000-6999) from the original sample. Banks operate with fundamentally different balance sheet structures - high leverage is normal, and "working capital" is not meaningful in a banking context. For bank credit risk, use the CAMELS rating framework or Merton's distance-to-default model instead.
The original model demonstrated 95% accuracy one year before filing and 72% accuracy two years prior. Beyond two years, predictive power degrades significantly - roughly 48% at three years and 29% at five years. The model is best treated as a short-term early warning system rather than a long-range forecast. Recalculate quarterly using updated financial statements for ongoing monitoring.
Working Capital equals Current Assets minus Current Liabilities. Current Assets include cash, accounts receivable, inventory, and short-term investments (items convertible to cash within 12 months). Current Liabilities include accounts payable, short-term debt, accrued expenses, and current portion of long-term debt. These line items appear on the balance sheet. If current liabilities exceed current assets, working capital is negative.