Altman Z-Score Calculator
| Component | Formula | Calculation | Weight | Weighted Value | Interpretation |
|---|---|---|---|---|---|
| X1 | Working Capital / Total Assets | - | 1.2 | - | Liquidity position |
| X2 | Retained Earnings / Total Assets | - | 1.4 | - | Profit retention |
| X3 | EBIT / Total Assets | - | 3.3 | - | Operating profitability |
| X4 | Market Equity / Total Debt | - | 0.6 | - | Financial leverage |
| X5 | Sales / Total Assets | - | 1.0 | - | Asset efficiency |
| Total Z-Score | - | Overall risk assessment | |||
| 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
Altman Z-Score Calculator: Your Guide to Understanding Financial Risk
Learn how to predict bankruptcy risk and assess company health using simple financial metrics
Imagine you could look into the financial future of a company and predict whether it might face bankruptcy within the next two years. That's exactly what the Altman Z-Score does! Created by Professor Edward Altman in 1968, this powerful formula has become the gold standard for predicting corporate bankruptcy risk.
In this simple, easy-to-understand guide, I'll explain everything about the Altman Z-Score in plain English - no finance degree required!
Try Our Altman Z-Score Calculator
Don't worry about complex formulas - just enter your company's financial numbers and let our calculator do the work. You'll get instant insights about financial health and bankruptcy risk.
What Exactly is the Altman Z-Score?
Simple Explanation
The Altman Z-Score is like a financial health checkup for companies. It combines five important financial ratios into one simple score that predicts whether a company might go bankrupt within the next 2 years.
Think of it as a "financial thermometer" - a high score means the company is financially healthy, while a low score indicates potential trouble.
The Z-Score looks at five different aspects of a company's financial health:
- Liquidity: Can the company pay its short-term bills?
- Profitability: Is the company making money over time?
- Efficiency: How well is the company using its assets?
- Market Confidence: What do investors think the company is worth?
- Sales Power: How good is the company at generating sales from its assets?
The Magic Formula (Simplified)
The Altman Z-Score Formula
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
Don't let the formula scare you! Here's what each part means:
Breaking Down Each Component
"Does the company have enough cash to operate?"
Working Capital = Current Assets - Current Liabilities
Example:
If a company has $200,000 in working capital and $1,000,000 in total assets:
X1 = $200,000 ÷ $1,000,000 = 0.20
"Has the company been profitable over time?"
Retained Earnings = All profits kept in the company (not paid out as dividends)
Example:
If retained earnings are $300,000 and total assets are $1,000,000:
X2 = $300,000 ÷ $1,000,000 = 0.30
"How efficient is the company at making money from its assets?"
EBIT = Earnings Before Interest and Taxes (operating profit)
Example:
If EBIT is $150,000 and total assets are $1,000,000:
X3 = $150,000 ÷ $1,000,000 = 0.15
"What do investors think the company is worth compared to its debts?"
Market Value = What the stock market says the company is worth
Example:
If market value is $500,000 and total debt is $400,000:
X4 = $500,000 ÷ $400,000 = 1.25
"How good is the company at generating sales from its assets?"
Example:
If sales are $800,000 and total assets are $1,000,000:
X5 = $800,000 ÷ $1,000,000 = 0.80
Putting It All Together
Complete Calculation Example
Using our example numbers above:
Z = (1.2 × 0.20) + (1.4 × 0.30) + (3.3 × 0.15) + (0.6 × 1.25) + (1.0 × 0.80)
Z = 0.24 + 0.42 + 0.495 + 0.75 + 0.80
Z = 2.705
This score of 2.71 gives us important information about the company's financial health.
What Does Your Score Mean?
| Z-Score Range | What It Means | Simple Explanation |
|---|---|---|
| Above 3.0 | Safe Zone | The company is financially healthy with low bankruptcy risk |
| 2.7 - 3.0 | Grey Zone | Some financial concerns - keep an eye on the company |
| 1.8 - 2.7 | Warning Zone | Potential financial distress - be cautious |
| Below 1.8 | Distress Zone | High bankruptcy risk - serious financial trouble |
Real-Life Example: Understanding a Company
Company A vs Company B
Company A (Healthy):
- Working Capital: $500,000
- Retained Earnings: $800,000
- EBIT: $400,000
- Market Value: $2,000,000
- Sales: $1,500,000
- Total Assets: $2,000,000
- Debt: $800,000
- Z-Score: 3.85 (SAFE)
Company B (Troubled):
- Working Capital: $50,000
- Retained Earnings: $100,000
- EBIT: $40,000
- Market Value: $200,000
- Sales: $400,000
- Total Assets: $800,000
- Debt: $600,000
- Z-Score: 1.42 (HIGH RISK)
Who Uses the Altman Z-Score?
- Investors: To decide which companies to invest in
- Banks: To decide who gets loans
- Suppliers: To decide who gets credit terms
- Company Management: To monitor their own financial health
- Analysts: To compare companies in the same industry
Important Things to Remember
Limitations and Considerations
- The Z-Score works best for manufacturing companies
- It's less accurate for service companies or tech startups
- Different industries have different "normal" scores
- It's a warning system, not a crystal ball
- Always consider other factors too (management quality, market conditions, etc.)
Frequently Asked Questions (16 Common Questions)
The Altman Z-Score is a formula that predicts whether a company might go bankrupt within the next 2 years by looking at 5 financial ratios. It's like a financial health checkup score.
Professor Edward Altman created it in 1968 while teaching at New York University. He tested it on bankrupt companies and found it was 72% accurate at predicting bankruptcy 2 years in advance.
A score above 3.0 means the company is in the "Safe Zone" - financially healthy with low risk of bankruptcy. Investors and lenders feel comfortable with companies in this range.
A score below 1.8 puts the company in the "Distress Zone" - high bankruptcy risk. This doesn't mean bankruptcy is certain, but it's a serious warning sign that needs attention.
All the numbers come from a company's financial statements: the Balance Sheet (for assets, liabilities, equity) and the Income Statement (for EBIT and sales).
For public companies, use the stock market value for equity. For private companies, use the book value of equity instead (since there's no stock price).
In Professor Altman's original study, it was 72% accurate at predicting bankruptcy 1 year in advance and 48% accurate 2 years in advance. It's a useful tool but not perfect.
It works best for manufacturing companies. There are modified versions for service companies, private companies, and companies in emerging markets.
EBIT stands for Earnings Before Interest and Taxes. It's the company's operating profit. You can find it on the Income Statement, usually calculated as Revenue - Operating Expenses.
Working Capital = Current Assets - Current Liabilities. It tells you if the company has enough short-term assets to cover its short-term debts. It's on the Balance Sheet.
Retained Earnings are all the profits a company has kept (not paid out as dividends) since it started. It's on the Balance Sheet under Shareholders' Equity.
The Grey Zone means "caution" - not panic. It suggests the company should monitor its finances closely and maybe make some improvements, but it's not necessarily in immediate danger.
At least once a year, or whenever new financial statements are available. Some companies calculate it quarterly to monitor trends.
No, it can't predict exact timing. It only predicts the probability of bankruptcy within the next 2 years. A low score means higher probability, not certainty.
Different industries have different averages. For example, technology companies might naturally have different scores than manufacturing companies. Compare with similar companies in your industry.
No! The Z-Score is one tool among many. Always consider other factors like management quality, market conditions, competition, and your own knowledge of the business.
Tips for Using the Z-Score Effectively
- Compare with competitors: See how your score compares to similar companies
- Track over time: Is your score improving or getting worse?
- Look at all five components: Which part of your business needs the most improvement?
- Use it as a discussion tool: Talk about the results with your team or advisors
- Don't panic over one bad score: Look at trends over several years
The Bottom Line
Key Takeaway
The Altman Z-Score is a powerful, easy-to-use tool for understanding financial risk. While it's not perfect (no single number can predict the future), it gives you valuable insights about a company's financial health.
Whether you're an investor, a business owner, or just curious about finance, understanding the Z-Score helps you make better financial decisions with more confidence.
Remember: A good Z-Score doesn't guarantee success, and a bad one doesn't guarantee failure. But it does give you important information to help you navigate financial decisions more wisely.