AbraCalc

Altman Z-Score Calculator

Calculate the Altman Z-Score to assess a public company's financial health and predict the probability of bankruptcy using five weighted financial ratios.

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How to use this tool

  1. Enter working capital, total assets, retained earnings, earnings before interest & taxes (ebit), market value of equity, total liabilities (book value of debt) and total revenue (net sales) in the fields above.
  2. Results update instantly as you type — or click Calculate.
  3. Read your altman z-score and the full breakdown beneath it.

Formula

Z = 1.2×X1 + 1.4×X2 + 3.3×X3 + 0.6×X4 + 1.0×X5

Where: X1 = Working Capital / Total Assets; X2 = Retained Earnings / Total Assets; X3 = EBIT / Total Assets; X4 = Market Value of Equity / Total Liabilities; X5 = Revenue / Total Assets.

Interpretation: Z > 2.99 = Safe Zone; 1.81 ≤ Z ≤ 2.99 = Grey Zone; Z < 1.81 = Distress Zone.

How it works

The Altman Z-Score, developed by Edward Altman in 1968, combines five financial ratios using discriminant analysis to produce a single score predicting corporate bankruptcy risk for publicly traded manufacturing companies. The original model was developed using data from 66 manufacturing firms and achieved over 90% accuracy in predicting bankruptcy one year in advance. The model uses the market value of equity (not book value) in the X4 ratio, making it applicable to publicly traded firms; separate formulations exist for private companies and non-manufacturers.

Worked example

Manufacturing Company Financial Assessment

  1. X1 = $200,000 / $1,000,000 = 0.20 (working capital ratio)
  2. X2 = $300,000 / $1,000,000 = 0.30 (retained earnings ratio)
  3. X3 = $150,000 / $1,000,000 = 0.15 (profitability ratio)
  4. X4 = $500,000 / $400,000 = 1.25 (leverage ratio)
  5. X5 = $800,000 / $1,000,000 = 0.80 (asset turnover)

Z = 1.2(0.20) + 1.4(0.30) + 3.3(0.15) + 0.6(1.25) + 1.0(0.80) = 0.24 + 0.42 + 0.495 + 0.75 + 0.80 = 2.705 (Grey Zone)

Key terms

Working Capital
Current assets minus current liabilities; measures short-term liquidity.
EBIT
Earnings Before Interest and Taxes — a measure of operating profitability before the effect of financing and tax decisions.
Safe Zone (Z > 2.99)
Companies in this range are considered financially healthy with a low probability of bankruptcy in the near term.
Grey Zone (1.81–2.99)
The indeterminate range where the model cannot clearly classify the firm; outcomes are uncertain and warrant closer monitoring.
Distress Zone (Z < 1.81)
Companies below this threshold are considered at high risk of bankruptcy within two years.

References & sources