📊 Altman Z-Score Calculator
Predict corporate bankruptcy risk using Edward Altman's five-factor Z-Score model — the gold standard for financial distress analysis since 1968.
The Altman Z-Score: Predicting Bankruptcy Since 1968
Edward Altman developed the Z-Score in 1968 by analyzing 66 manufacturing companies — half of which had filed for bankruptcy. The model uses five financial ratios weighted by their predictive power: X1 (liquidity), X2 (cumulative profitability), X3 (operating efficiency), X4 (leverage), and X5 (asset efficiency). In backtesting, the model correctly predicted bankruptcy 72% of the time two years before filing and 95% one year before filing.
Z-Score Zones and Their Meaning
| Z-Score | Zone | Interpretation |
|---|---|---|
| Above 2.99 | ✅ Safe Zone | Financially healthy, low default probability |
| 1.81 – 2.99 | ⚠️ Grey Zone | Uncertainty — monitor trend over multiple quarters |
| Below 1.81 | 🚨 Distress Zone | High probability of financial distress within 2 years |
The grey zone is the most important: companies here need trend analysis over multiple quarters, not a single-point-in-time Z-Score. A company with a rising Z-Score from 1.9 to 2.4 over four quarters is in a very different position than one falling from 2.8 to 2.1.
The Five Factors and Their Weights
Z = 1.2×X1 + 1.4×X2 + 3.3×X3 + 0.6×X4 + 1.0×X5
X1 (Working Capital / Total Assets) — measures short-term liquidity relative to company size.
X2 (Retained Earnings / Total Assets) — measures cumulative profitability; higher retained earnings indicate age and profitability history.
X3 (EBIT / Total Assets) — the most heavily weighted factor; measures operating efficiency and return on assets before financing effects.
X4 (Market Value Equity / Total Liabilities) — measures how much assets can decline before liabilities exceed assets.
X5 (Revenue / Total Assets) — measures asset turnover efficiency.
People Also Ask
The original model was designed for public manufacturing companies. Altman later developed Z'-Score for private companies (substituting book value of equity for market value in X4) and Z''-Score for non-manufacturers (removing the asset turnover X5 factor). Academic research shows the model remains approximately 70–80% accurate for large public companies. Modern credit agencies use more sophisticated models but often include Z-Score as one input.
Any score above 2.99 places a company in the Safe Zone — low default risk. Scores between 1.81 and 2.99 are ambiguous; some of these companies survive while others fail. Below 1.81 indicates high distress probability. Note: thresholds differ for the Z'-Score model for private companies (safe above 2.9, distress below 1.23) and the Z''-Score for non-manufacturers (safe above 2.6, distress below 1.1).
Yes — capital-intensive businesses with low retained earnings (young companies), low asset turnover (utilities, real estate), or high leverage (private equity buyouts) may show low Z-Scores despite being operationally healthy. Always interpret Z-Score in industry context. A utility company at Z=1.9 may be perfectly safe; a retailer at Z=1.9 warrants concern. Sector-specific models exist for banks and financial institutions where the original model is inappropriate.
The original Z-Score uses market value of equity in X4 — only available for publicly traded companies. The Z'-Score substitutes book value of equity for private companies that don't have a market price. The Z''-Score removes X5 (revenue/assets) entirely because asset turnover ratios vary so widely across non-manufacturing industries that it distorts comparisons.