What is the Altman Z-Score?
The Altman Z-Score is a bankruptcy-risk model that estimates how likely a company is to run into serious financial distress. It rolls up a handful of profitability, liquidity, leverage, and efficiency ratios into one number you can use as a quick “health check” (especially useful when screening companies, lenders/credit committees, or comparing peers).
If you want to sanity-check the inputs behind the score, related metrics you may want to calculate separately include: Working Capital, Current Ratio, Quick Ratio, Debt-to-Equity Ratio, Interest Coverage Ratio, EBIT Margin, Retained Earnings, Market Cap, and Total Assets.
Formula (Original Altman Z-Score)
What the score generally means (original model):
- Z > 2.99 → Safe Zone (lower distress risk)
- 1.81 ≤ Z ≤ 2.99 → Grey Zone (watch closely; mixed signals)
- Z < 1.81 → Distress Zone (higher distress risk)
Practical note: the “original” Z-Score was designed for public manufacturing firms. For private companies or non-manufacturers, analysts often use modified versions (Z′ / Z″). Still, the original is fine as a quick screening tool as long as you don’t treat it like a guarantee.
Worked Example
Given:
- Current Assets = $500,000
- Current Liabilities = $300,000
- Total Assets (TA) = $1,000,000
- Retained Earnings (RE) = $200,000
- EBIT = $150,000
- Market Value of Equity (MVE) = $800,000
- Total Liabilities (TL) = $400,000
- Sales = $900,000
Step 1) Compute each ratio
- Working Capital = Current Assets − Current Liabilities
- RE/TA = 200,000 / 1,000,000 = 0.20
- EBIT/TA = 150,000 / 1,000,000 = 0.15
- MVE/TL = 800,000 / 400,000 = 2.00
- Sales/TA = 900,000 / 1,000,000 = 0.90
= $500,000 − $300,000 = $200,000 → WC/TA = 200,000 / 1,000,000 = 0.20
Step 2) Plug into the formula
Z = 1.2(0.20) + 1.4(0.20) + 3.3(0.15) + 0.6(2.00) + 1.0(0.90)
Z = 0.24 + 0.28 + 0.495 + 1.20 + 0.90
Z = 3.115 ≈ 3.12
Interpretation
The Altman Z-Score is ~3.12, which falls in the Safe Zone under the original model (lower financial distress risk based on these inputs).