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
| Date | Z-Score | Risk Status | Total Assets | Currency | Actions |
|---|
Assess Financial Health with the Altman Z-Score Calculator
Learn how to use the Altman Z-Score to evaluate bankruptcy risk and make informed financial decisions
The Altman Z-Score is one of the most widely used financial models for predicting corporate bankruptcy. Developed by NYU Professor Edward Altman in 1968, this formula has stood the test of time as a reliable indicator of financial distress.
In this comprehensive guide, we'll explore how our Altman Z-Score Calculator can help you assess a company's financial health, understand bankruptcy risk, and make more informed investment or credit decisions.
Why Financial Health Assessment Matters
What is the Altman Z-Score?
The Altman Z-Score is a financial formula that measures a company's financial health and predicts the likelihood of bankruptcy within two years. It combines five key financial ratios that measure different aspects of a company's financial position.
Understanding a company's financial health helps:
- Investors: Identify potentially risky investments
- Creditors: Assess creditworthiness and default risk
- Management: Monitor financial stability and early warning signs
- Analysts: Compare companies within the same industry
- Acquirers: Evaluate target companies during M&A activities
Key Features of Our Altman Z-Score Calculator
Comprehensive Calculation
Accurately computes all five components of the Z-Score formula with detailed breakdowns.
Risk Assessment
Clear classification into safe, grey, warning, and distress zones with visual indicators.
Detailed Analysis
Comprehensive breakdown of each ratio with explanations of what they measure.
Export & Reporting
Save your analysis in multiple formats (PDF, HTML, TXT) for presentations or records.
Understanding the Altman Z-Score Formula
The Z-Score Formula
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Where:
- X1 = Working Capital / Total Assets (Liquidity measure)
- X2 = Retained Earnings / Total Assets (Cumulative profitability)
- X3 = EBIT / Total Assets (Operating efficiency)
- X4 = Market Value of Equity / Total Liabilities (Market leverage)
- X5 = Sales / Total Assets (Asset turnover)
Interpreting Z-Score Results
The Z-Score places companies into different risk categories:
How to Use the Altman Z-Score Calculator
Step-by-Step Guide
- Gather financial data: Collect the company's latest financial statements
- Enter the values: Input working capital, total assets, retained earnings, EBIT, market value of equity, book value of debt, and sales
- Calculate: Click the calculate button to generate the Z-Score and analysis
- Interpret results: Review the risk assessment and detailed ratio breakdown
- Export if needed: Save or print the results for further analysis or reporting
This calculator is perfect for:
- Financial analysts evaluating company stability
- Investors screening potential investments
- Credit analysts assessing loan applications
- Corporate finance professionals monitoring their own company
- Students learning financial analysis techniques
Pro Tip: Industry Variations
The standard Z-Score thresholds work well for manufacturing companies, but different industries may have different norms. Always compare a company's Z-Score to industry averages for more accurate assessment.
Understanding the Five Components
X1: Working Capital / Total Assets
This ratio measures the company's liquidity position - its ability to pay short-term obligations with short-term assets. A higher ratio indicates better liquidity.
X2: Retained Earnings / Total Assets
This measures the company's cumulative profitability over time and its reliance on debt versus internally generated funds. Companies with higher retained earnings relative to assets are generally more stable.
X3: EBIT / Total Assets
This ratio evaluates operating efficiency - how effectively the company is using its assets to generate operating profits. Higher values indicate better operational performance.
X4: Market Value of Equity / Total Liabilities
This measures market leverage - how much the market values the company relative to its debt obligations. A higher ratio suggests the market has confidence in the company's future.
X5: Sales / Total Assets
This asset turnover ratio indicates how efficiently the company is using its assets to generate sales. Higher values suggest better utilization of assets.
Limitations of the Altman Z-Score
While powerful, the Altman Z-Score has some limitations to consider:
- Industry-specific: Originally designed for manufacturing firms, less accurate for service companies
- Market-dependent: X4 relies on market value, which can be volatile
- Time-sensitive: Based on point-in-time financial data
- Not predictive: Indicates probability, not certainty of bankruptcy
- Manipulable: Companies can temporarily improve ratios through financial engineering
Using the Calculator for Financial Decisions
Investment Analysis
Use the Z-Score to screen potential investments:
- Avoid companies in the distress zone unless you're a specialized distressed investor
- Be cautious with companies in the warning zone - conduct additional due diligence
- Companies in the safe zone generally represent lower bankruptcy risk
Credit Risk Assessment
Evaluate loan applicants using Z-Score analysis:
- Set minimum Z-Score thresholds for different loan types
- Use the score as part of a comprehensive credit evaluation
- Monitor existing borrowers' Z-Scores over time
Corporate Financial Management
Monitor your own company's financial health:
- Track Z-Score trends over time to identify deteriorating financial health
- Compare your score to industry competitors
- Use the component analysis to identify areas for improvement
Tracking Performance Over Time
Use the export features to save your calculations and track a company's Z-Score over multiple periods. This trend analysis can provide early warning signs of financial deterioration or improvement.
Frequently Asked Questions
How accurate is the Altman Z-Score?
The original Altman Z-Score was about 72% accurate in predicting bankruptcy one year before the event and about 48% accurate two years before. Updated versions have improved accuracy, but it should always be used alongside other analysis tools.
Can the Z-Score be used for private companies?
Yes, but you'll need to estimate the market value of equity since private companies don't have publicly traded stock. Common approaches include using book value or applying industry multiples.
What's the difference between the original and revised Z-Score models?
Professor Altman developed different models for private companies (Z'-Score) and non-manufacturing companies (Z"-Score). Our calculator uses the original model, which works best for public manufacturing firms.
How often should I calculate a company's Z-Score?
For active monitoring, calculate the Z-Score quarterly when new financial statements are released. For investment analysis, calculate it whenever you're considering a new position or reviewing an existing one.
What if a company has a low Z-Score but seems healthy otherwise?
The Z-Score is one tool among many. Always conduct comprehensive due diligence including qualitative factors, industry analysis, management assessment, and review of other financial metrics before making decisions.