Altman Z-Score Calculator
Print| Solvency Zone | - |
Developed by NYU Stern Finance Professor Edward Altman in 1968, the Altman Z-Score is the quantitative gold standard for predicting the probability that a company will enter bankruptcy within 2 years. By combining five weighted financial ratios derived from balance sheet and income statement filings, the formula evaluates solvency, liquidity, profitability, and leverage.
Our free Altman Z-Score Calculator computes Z-Scores for public manufacturing enterprises, private firms, and non-manufacturing service businesses to classify credit distress zones.
How to Calculate the Altman Z-Score
The original Altman Z-Score model uses five weighted financial ratios to produce a single composite credit risk score.
Original Manufacturing Z-Score Formula:
Z = 1.2(X₁) + 1.4(X₂) + 3.3(X₃) + 0.6(X₄) + 0.999(X₅)
- X₁ (Liquidity):
Working Capital / Total Assets - X₂ (Cumulative Profitability):
Retained Earnings / Total Assets - X₃ (Operating Profitability):
EBIT / Total Assets - X₄ (Market Solvency):
Market Value of Equity / Total Liabilities - X₅ (Asset Turnover):
Sales / Total Assets
Step-by-Step Credit Risk Example
Suppose an industrial manufacturing enterprise reports the following ratio inputs across its balance sheet and income statement:
- X₁ (Working Capital / Assets): 0.20
- X₂ (Retained Earnings / Assets): 0.30
- X₃ (EBIT / Assets): 0.15
- X₄ (Market Cap / Liabilities): 1.20
- X₅ (Sales / Assets): 1.10
Let’s calculate the weighted Z-Score components step-by-step:
1.2 × 0.20 = 0.240
1.4 × 0.30 = 0.420
3.3 × 0.15 = 0.495
0.6 × 1.20 = 0.720
0.999 × 1.10 = 1.099
Composite Z-Score = 0.240 + 0.420 + 0.495 + 0.720 + 1.099 = 2.974
| Altman Z-Score Range | Distress Zone Rating | 2-Year Bankruptcy Probability | Financial Solvency Assessment |
|---|---|---|---|
| Z > 2.99 | Safe Zone | Very Low Risk (< 10%) | Robust balance sheet health & liquidity |
| 1.81 < Z < 2.99 (Calculated 2.97) | Grey Zone (Borderline Safe) | Moderate Caution | Acceptable, but monitor working capital & debt |
| Z < 1.81 | Distress Zone | High Bankruptcy Probability (> 80%) | Severe insolvency & default danger |
Frequently Asked Questions (FAQ)
What is a good Altman Z-Score?
An Altman Z-Score above 3.00 indicates that a company is in the “Safe Zone” with a very low probability of bankruptcy. A score below 1.81 signals high financial distress and insolvency risk.
How accurate is the Altman Z-Score for predicting bankruptcy?
Historical empirical testing shows that the Altman Z-Score is 80% to 90% accurate in predicting corporate bankruptcy 1 year prior to default, and approximately 70% accurate 2 years prior.
Can the Altman Z-Score be used for commercial banks and financial institutions?
No. The standard Altman Z-Score model cannot be applied to banks, insurance companies, or financial institutions because their balance sheets hold massive cash-equivalent debt liabilities as normal operating assets.