Altman Z-Score Calculator
Assess a company's financial health and bankruptcy risk
| Z-Score Range | Interpretation | Your Score | Status |
|---|---|---|---|
| Above 3.0 | Safe zone - Low bankruptcy risk | - | - |
| 2.7 - 3.0 | Grey zone - Moderate risk | - | - |
| 1.8 - 2.7 | Warning zone - Possible financial distress | - | - |
| Below 1.8 | Distress zone - High bankruptcy risk | - | - |
The Altman Z-Score is a financial model that predicts the probability of a company going bankrupt within two years. It combines five financial ratios that measure different aspects of a company's financial health.
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Where:
• X1 = Working Capital/Total Assets
• X2 = Retained Earnings/Total Assets
• X3 = EBIT/Total Assets
• X4 = Market Value Equity/Total Liabilities
• X5 = Sales/Total Assets
• Less accurate for private companies
• Industry-specific variations exist
• Doesn't account for qualitative factors
• May need adjustment for different sectors
1. Multi-Dimensional Financial Health Assessment
Unlike simple liquidity ratios, the Z-Score evaluates five key financial ratios, combining profitability, leverage, liquidity, and efficiency into a single predictive score.
The formula:
Where:
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = EBIT / Total Assets
D = Market Value of Equity / Total Liabilities
E = Sales / Total Assets
2. Different Models for Different Entities
Original Z-Score (1968) → For publicly traded manufacturing firms.
Z’-Score (Private Firms) → Adjusted for private companies (replaces Market Value with Book Value).
Z’’-Score (Non-Manufacturing & Emerging Markets) → Modified for service firms and international businesses.
3. Bankruptcy Prediction Thresholds
Z > 2.99 → "Safe Zone" (Low bankruptcy risk).
1.81 < Z < 2.99 → "Grey Zone" (Caution required).
Z < 1.81 → "Distress Zone" (High bankruptcy risk).
4. Used Beyond Corporate Finance
Credit Rating Agencies → Some adjust their risk models based on Z-Score trends.
M&A Due Diligence → Acquirers use it to assess target firm stability.
Legal & Regulatory Cases → Sometimes cited in bankruptcy court as evidence.
5. Limitations & Criticisms
Industry-Specific Biases → Works best for manufacturing; less accurate for tech or service firms.
Market Value Dependency → Volatile stock prices can distort the score for public companies.
Not Foolproof → Some companies with low Z-Scores survive, while some with high scores fail due to external shocks.
6. Modern Adaptations & AI Enhancements
Some advanced Z-Score calculators now incorporate machine learning to refine predictions using additional variables like macroeconomic trends.
Integration with real-time financial dashboards (e.g., Bloomberg Terminal, QuickBooks).
7. Free vs. Premium Calculators
Basic versions → Use simple balance sheet inputs.
Advanced versions → Adjust for inflation, industry benchmarks, and global accounting standards (IFRS vs. GAAP).
Why It Stands Out?
The Altman Z-Score remains one of the few quantitative models with a proven track record (over 90% accuracy in original studies). While newer models exist, its simplicity and adaptability keep it relevant even after 50+ years.