Altman Z-Score - Explained
What is the Altman Z - Score?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is the Altman Z Score ?
The Altman Z-Score a formula used to determine the financial condition of the company and its probability of bankruptcy.
What is the Altman Z-Score Formula?
There are 4 distinct Z-Score formulas customized for the type of business being assessed. The formulas include:
Public Manufacturing Company
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Where:
- 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
The outcome of the formula can fall in the following ranges:
- Safe Zone is 2.99 - 4.0
- Grey Zone is 1.81 - 2.99
- Red Zone is 0 - 1.81
Private Company
Altman Z Score = (0.717 x A) + (0.847 x B) + (3.107 x C) + (0.420 x D) + (0.998 x E)
- A = (Working Capital) / Total Assets
- B = Retained Earnings / Total Assets
- C = Earnings Before Interest and Taxes / Total Assets
- D = Book Value of Equity / Total Liabilities
- E = Sales / Total Assets
The outcome of the formula can fall in the following ranges:
- Safe Zone is 2.99 - 4.0
- Grey Zone is 1.23 - 2.99
- Red Zone is 0 - 1.23
Non-Manufacturing Company
Altman Z-Score = (6.56 x A) + (3.26 x B) + (6.72 x C) + (1.05 x D)
- A = Working Capital / Total Assets
- B = Retained Earnings / Total Assets
- C = Earnings Before Interest and Taxes / Total Assets
- D = Book Value of Equity / Total Liabilities
The outcome of the formula can fall in the following ranges:
- Safe Zone is 2.6 - 4.0
- Grey Zone is 1.1 - 2.6
- Red Zone is 0 - 1.1
Emerging Markets
Altman Z-Score = 3.25 + (6.56 x A) + (3.26 x B) + (6.72 x C) + (1.05 x D)
- A = Working Capital / Total Assets
- B = Retained Earnings / Total Assets
- C = Earnings Before Interest and Taxes / Total Assets
- D = Book Value of Equity / Total Liabilities
The outcome of the formula can fall in the following ranges:
- Safe Zone is 2.6 - 4.0
- Grey Zone is 1.1 - 2.6
- Red Zone is 0 - 1.1
How is the Altman Z-Score Used?
Generally, the lower the Z-score, the higher the odds that a company is heading for bankruptcy.
Who Created the Altman Z-Score Used?
The Altman Z-Score was introduced by Edward Altman, a professor at the University of New York, in 1960. This tool measures the company's viability in the long term and the possibility of the company's bankruptcy.