Altman Z-score
The Altman Z-score is a formula that combines five financial ratios into one score of a company’s risk of bankruptcy. Edward Altman published the model in 1968 for public manufacturers, and versions adapt it for private companies and non-manufacturers. The original model classifies scores into safe, grey and distress zones.
Example
For illustration, suppose a public manufacturer has working capital to total assets of 0.10, retained earnings to total assets of 0.20, EBIT to total assets of 0.08, market value of equity to total liabilities of 0.50, and sales to total assets of 1.00. The calculation is (1.2 × 0.10) + (1.4 × 0.20) + (3.3 × 0.08) + (0.6 × 0.50) + (1.0 × 1.00) = 1.964, in the original model’s grey zone.
The Altman Z-score formula and its versions
For the original public-manufacturer Z-score, multiply working capital / total assets by 1.2, retained earnings / total assets by 1.4, EBIT / total assets by 3.3, market value of equity / total liabilities by 0.6, and sales / total assets by 1.0. Add the five products to get the score.
The Z'-score uses book value of equity for private companies. The Z''-score drops sales over assets for non-manufacturers and emerging markets. These versions change which measures the formula uses, so identify the version before interpreting a score.
Reading the score across years and its limits
In the original model, a score above 2.99 is in the safe zone. A score from 1.81 to 2.99 is in the grey zone. A score below 1.81 is in the distress zone.
A lender can compare a company’s scores across years using the same version. A rising score moves toward the safe zone, and a falling score moves toward distress. The original model was designed for public manufacturers, so its zones should be read in that context. A zone describes the model’s assessment of bankruptcy risk, not certainty about a company’s future.
Questions we get asked
Who developed the Altman Z-score, and when?
Edward Altman published the model in 1968. The original Z-score was for public manufacturing companies.
Does a score in the safe zone mean bankruptcy is impossible?
No. In the original model, “safe” is the label for scores above 2.99. It is a zone in a bankruptcy-risk model, not a guarantee about what will happen to a company.
Does the Altman Z-score assess an individual borrower?
No. The Altman Z-score assesses a company’s risk of bankruptcy. It is not a measure of an individual applicant’s creditworthiness.
The free Altman Z-score calculator calculates scores for public, private or non-manufacturing companies over up to three years, with a zone for each year.
