Altman Z-Score

The Altman Z-Score is a bankruptcy-prediction model that combines five financial ratios into a single distress gauge. Edward Altman published it in 1968, and the original formula for public manufacturers is: Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E, where A = working capital / total assets, B = retained earnings / total assets, C = EBIT / total assets, D = market value of equity / total liabilities, and E = sales / total assets.

The zones: Z below 1.81 signals distress, 1.81 to 2.99 is the grey zone, and above 2.99 is the safe zone. In Altman's original sample the model correctly classified the large majority of bankruptcies up to two years ahead, and it remains a standard credit screen half a century later.

Scope matters. The 1968 coefficients were fit on manufacturers; Altman later published a Z'-Score for private firms and a Z''-Score for non-manufacturers, and none of the variants work for banks or insurers, whose balance sheets break the ratios. A low Z is a flag for deeper credit work, not a bankruptcy verdict — and a high-Z company can still torch shareholders without ever going bankrupt.