About

The Altman Z-Score is a quantitative model used to predict the probability of a business entering bankruptcy within the next two years. Originally published by Edward Altman in 1968, the model aggregates five financial ratios derived from a company's balance sheet and income statement. It provides a composite score that classifies firms into "Safe", "Grey", or "Distress" zones. Investors, auditors, and creditors utilize this metric to assess credit risk and financial solvency with high statistical reliability.

Formulas

The formula weights liquidity, profitability, operating efficiency, and market valuation.

{

Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0EWhere:A = Working Capital / Total AssetsB = Retained Earnings / Total AssetsC = EBIT / Total AssetsD = Market Value of Equity / Total LiabilitiesE = Sales / Total Assets

Reference Data

Score Range	Zone Classification	Interpretation
Z > 2.99	Safe Zone	Low probability of bankruptcy. Healthy financial structure.
1.81 < Z < 2.99	Grey Zone	Uncertainty. Caution required. Company is exposed to some risk.
Z < 1.81	Distress Zone	High probability of bankruptcy. Financial restructuring likely needed.

Frequently Asked Questions

The original formula (used here) is optimized for public manufacturing companies. Private firms or service sector companies typically require modified coefficients (Altman Z'-Score or Z''-Score) because they lack market capitalization data or have different asset structures.

The EBIT/Total Assets ratio (Factor C, weighted 3.3) is often considered the most critical. It measures true productivity independent of tax or leverage, indicating if the core business model is actually generating value.

Yes. A low score indicates statistical risk, not a guarantee of failure. Startups often have low scores due to negative retained earnings, yet they may be solvent due to venture capital backing. Context is essential.

For public companies, this is the Market Cap (Stock Price × Shares Outstanding). Using "Book Value" instead makes the formula much stricter and is technically a variation of the original model.