What is the Altman Z-Score?

Altman’s Z-Score model is a numerical measurement that is used to predict the chances of a company going bankrupt in the next two years. It is considered by many to be a reasonable measure of the financial stability of companies.

Altman’s Z-Score Model Formula

The Z-score model is based on five key financial ratios based on a company's fundamentals.

The Altman’s Z-score formula is written as follows:

ζ = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

Zeta(ζ) is the Altman’s Z-score
A is the Working Capital/Total Assets ratio
B is the Retained Earnings/Total Assets ratio
C is the Earnings Before Interest and Tax/Total Assets ratio
D is the Market Value of Equity/Total Liabilities ratio
E is the Total Sales/Total Assets ratio

Interpreting the Altman Z-Score

Usually, the lower the Z-score, the higher the odds that a company is heading for bankruptcy. The ranges and severity of the Z-score are:

When Altman Z-Score <= 1.8, it is in "Distress Zones" and has a very high probability of reaching the stage of bankruptcy.
When Altman Z-Score is between 1.8 and 3, it is in "Grey Zones" and has a moderate probability of bankruptcy.
When Altman Z-Score >= 3, it is in "Safe Zones" and has a negligible probability of filing bankruptcy