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.
How to use this tool
- 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.
- Results update instantly as you type — or click Calculate.
- Read your altman z-score and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
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
- X1 = $200,000 / $1,000,000 = 0.20 (working capital ratio)
- X2 = $300,000 / $1,000,000 = 0.30 (retained earnings ratio)
- X3 = $150,000 / $1,000,000 = 0.15 (profitability ratio)
- X4 = $500,000 / $400,000 = 1.25 (leverage ratio)
- 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)
Common mistakes to avoid
- Applying the public-company formula (original Z-score) to private companies — Altman developed a separate Z'-score for private firms with modified coefficients and book value of equity in X4 instead of market value; using the public formula on private company data produces misleading results.
- Using book value of equity in X4 for a public company — the original formula requires market capitalisation (shares outstanding x share price) in the numerator of X4, not shareholders' equity from the balance sheet.
- Treating the Z-score as a point-in-time verdict rather than a trend — a single quarter's Z-score can be distorted by seasonality or one-time items; tracking the score over multiple periods reveals whether financial health is improving or deteriorating.
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.
Frequently asked questions
- What Z-score thresholds indicate distress versus safety?
- For the original public-company model: Z above 2.99 is the safe zone, Z below 1.81 is the distress zone, and 1.81 to 2.99 is the grey zone. For the Z' private-company model the thresholds shift to 2.90 (safe) and 1.23 (distress).
- How accurate is the Altman Z-Score at predicting bankruptcy?
- In Altman's original 1968 study the model correctly classified 95% of companies in the year before bankruptcy. Predictive accuracy declines with time horizon -- accuracy drops to roughly 70% two years out. Modern studies find somewhat lower accuracy on out-of-sample data.
- Does the Z-score work for financial sector companies?
- No -- banks, insurance companies, and other financial firms have capital structures and balance sheet compositions that invalidate the Z-score ratios. Altman developed separate models (e.g. the ZETA model and sector-specific variants) for financial institutions.