Altman Z-Score Calculator
Predict bankruptcy risk with the Altman Z-Score model
Z-Score Formulas
Understanding the Altman Z-Score
The Altman Z-Score, developed by Professor Edward Altman in 1968, predicts the probability of a company entering bankruptcy within two years. It combines five financial ratios into a single score using discriminant analysis based on historical bankruptcy data.
The original model was 72% accurate in predicting bankruptcy two years prior to the event and 80-90% accurate one year prior. It's one of the most widely used and validated financial distress prediction models.
The Z-Score uses five ratios: Working Capital/Assets (liquidity), Retained Earnings/Assets (profitability history), EBIT/Assets (operating efficiency), Market Value/Liabilities (leverage), and Sales/Assets (asset utilization).
Z-Score Interpretation
Z > 2.99 (Safe)
Low bankruptcy risk. Financially healthy with strong fundamentals.
Z 1.81-2.99 (Grey)
Warning zone. Needs attention. Could go either way.
Z < 1.81 (Distress)
High bankruptcy risk. Serious financial distress likely.
Modified Models
Different thresholds for private companies and non-manufacturing firms.
Z-Score Components
| Ratio | Formula | Weight | Measures |
|---|---|---|---|
| X1 | WC / TA | 1.2 | Liquidity |
| X2 | RE / TA | 1.4 | Cumulative profitability |
| X3 | EBIT / TA | 3.3 | Operating efficiency |
| X4 | MVE / TL | 0.6 | Leverage (market) |
| X5 | Sales / TA | 1.0 | Asset turnover |
Using Z-Score Effectively
Match the Model
Use original for public manufacturing, Z' for private, Z'' for non-manufacturing/service.
Track Trends
A declining Z-Score is a warning even if still in safe zone. Watch direction, not just level.
Combine with Other Analysis
Z-Score is one tool. Combine with cash flow analysis, industry comparison, and qualitative factors.
Know Limitations
Less reliable for financial firms, emerging markets, and during unusual economic conditions.
Frequently Asked Questions
How accurate is the Z-Score?
Original research showed 72% accuracy two years before bankruptcy, 80-90% one year prior. Subsequent studies confirm 70-80% accuracy. It's best used as an early warning indicator alongside other analysis.
Can I use Z-Score for banks or insurers?
No. The original Z-Score was not designed for financial institutions. Their unique balance sheet structure makes the ratios meaningless. Use specialized models for financial firms.
What if I don't have market value of equity?
For private companies, use the Z' model which substitutes book value of equity. The coefficients are adjusted accordingly. This is common for private company analysis.
What causes low Z-Scores?
Key drivers: negative working capital (liquidity crisis), accumulated losses (negative retained earnings), operating losses (negative EBIT), high leverage, or poor asset utilization. Address the weakest ratios.
Pro Tips
- Bookmark this calculator for quick access in the future
- Use the share button to send your results to others
- Try different scenarios to compare outcomes
- Check out our related calculators for more insights
Found this calculator helpful? Share it with others: