What is the Altman Z-Score?

The Altman Z-Score is a quantitative financial model developed by Edward Altman in 1968 that predicts the probability of a company entering bankruptcy within two years by combining five financial ratios into a single composite score.

What Z-Score indicates bankruptcy risk?

For public manufacturing companies, a Z-Score below 1.81 indicates significant distress risk. Scores above 2.99 are considered safe. For private or non-manufacturing companies (Z''-Score), the thresholds are 1.10 (distress) and 2.60 (safe).

How accurate is the Altman Z-Score?

The 1968 model correctly classified approximately 72-80% of distressed firms two years before bankruptcy in Altman's original sample. Accuracy varies by industry, time period, and accounting environment. It is most reliable for manufacturing companies and should be used as one screening tool among many.

What is the difference between the Z-Score and Z''-Score?

The original Z-Score (1968) was designed for publicly traded manufacturing companies and includes a Sales/Total Assets ratio (X5). The Z''-Score (1983/2005) removes this ratio, making it appropriate for private companies, service firms, and non-manufacturing businesses.

Altman Z-Score Calculator — Altman Z Score

1

Select your company type

Choose Public Manufacturing for publicly traded manufacturing companies (the original 1968 model using 5 ratios) or Private / Service for private companies and non-manufacturing businesses (the 1983 revised model using 4 ratios). The private model omits the Sales/Assets factor because that ratio is less predictive outside the manufacturing sector.

2

Enter the financial inputs from the balance sheet

Pull the numbers from the company's most recent annual financial statements. Working Capital equals Current Assets minus Current Liabilities. Retained Earnings is the cumulative net income not paid as dividends — it can be negative for young or loss-making companies. EBIT is Earnings Before Interest and Taxes. For the public model, use Market Capitalisation for Equity Value; for the private model, use the Book Value of Equity from the balance sheet.

3

Read the Z-Score and solvency zone

The calculator instantly computes the Altman Z-Score and classifies it into one of three zones: Safe Zone (Z > 2.99 for public, Z > 2.90 for private) suggests low near-term bankruptcy risk; Grey Zone (1.81–2.99 / 1.23–2.90) signals financial uncertainty — monitor closely; Distress Zone (Z < 1.81 / Z < 1.23) indicates elevated bankruptcy risk. The solvency gauge shows exactly where the score falls.

4

Use Scenario Analysis to stress-test

Switch to the Scenario Analysis tab to see how the Z-Score responds when a single input changes ±40% from the current value. Use this to identify which financial lever — EBIT improvement, working capital management, or debt reduction — would move the company out of a distress or grey zone most efficiently.

Public Manufacturing Z-Score (Altman 1968)

Z = 1.2·X₁ + 1.4·X₂ + 3.3·X₃ + 0.6·X₄ + 0.999·X₅

Where X₁ = Working Capital / Total Assets (liquidity), X₂ = Retained Earnings / Total Assets (profitability over time), X₃ = EBIT / Total Assets (operating profitability), X₄ = Market Value of Equity / Total Liabilities (leverage), X₅ = Sales / Total Assets (asset turnover). Zone thresholds: Safe Z > 2.99 · Grey 1.81–2.99 · Distress Z < 1.81.

Private / Service Z'-Score (Altman 1983)

Z' = 6.56·X₁ + 3.26·X₂ + 6.72·X₃ + 1.05·X₄

Uses the same four ratios but replaces Market Value of Equity with Book Value of Equity for X₄ (private companies lack a market price), and removes the Sales/Assets ratio X₅ because it was found to be less predictive for non-manufacturing sectors. Recalibrated thresholds: Safe Z' > 2.90 · Grey 1.23–2.90 · Distress Z' < 1.23.

Written by Quinn Sumner Updated 2026-06-01 2 sources Methodology & limitations

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Author: Quinn Sumner{{^authorProfileUrl}}Quinn Sumner{{/authorProfileUrl}} - Editor

Owner: Calculover Editorial - Finance & Investing Content

Last reviewed: 2026-06-01

Last verified: 2026-06-01

Methodology

Implements Altman (1968) 5-factor public model and Altman (1983) 4-factor private/service model using published coefficients and zone thresholds. All arithmetic is applied directly from the peer-reviewed source formulas with no modifications.

Assumption: Financial inputs are taken from the most recent annual financial statements and reflect year-end figures.

Assumption: For the public model, Market Value of Equity is shares outstanding multiplied by the current share price.

Assumption: For the private model, Book Value of Equity is Total Assets minus Total Liabilities as reported on the balance sheet.

Assumption: The model was calibrated on US companies; accuracy may differ for non-US firms due to differences in accounting standards.

Limitations & guidance

Not suitable for financial institutions (banks, insurance companies) whose balance sheets differ structurally from manufacturing firms.

The model uses historical accounting data and cannot capture real-time deterioration between reporting periods.

Early-stage companies with high growth investment and low retained earnings may receive artificially low Z-Scores that do not reflect their true risk.

The Z-Score is a screening tool, not a definitive bankruptcy prediction. Always combine with qualitative analysis, cash-flow review, and professional judgement.

Professional guidance: This calculator is for educational and informational purposes only and does not constitute financial, investment, or legal advice. The Altman Z-Score is a quantitative screening tool with known limitations. Do not make investment, credit, or restructuring decisions based solely on this output. Consult a qualified financial professional for advice specific to your situation.

Primary sources

Altman, E. I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, 23(4), 589–609.

Altman, E. I. (1983). Corporate Financial Distress. Wiley.

Working Capital (X₁) Current Assets minus Current Liabilities. Measures short-term liquidity. Negative working capital means current liabilities exceed current assets — a common early warning of financial stress. Divided by Total Assets to normalise for company size.

Retained Earnings (X₂) Cumulative net profits kept in the business rather than paid out as dividends. Captures the age and earning history of the company: mature, profitable companies have high retained earnings relative to assets, while young or loss-making companies have low or negative retained earnings.

EBIT / Total Assets (X₃) Earnings Before Interest and Taxes divided by Total Assets. The most important ratio in the model — it measures how efficiently the company generates operating profit from its assets, independent of financing structure and tax effects.

Equity / Liabilities (X₄) Market Value of Equity divided by Total Liabilities (public model) or Book Value of Equity divided by Total Liabilities (private model). Measures how much asset value can decline before liabilities exceed assets and the company becomes technically insolvent.

Sales / Total Assets (X₅) Annual Sales divided by Total Assets. Measures asset turnover — how much revenue the company generates per dollar of assets. Included in the public manufacturing model only; excluded from the private model where it was found to be less discriminating.

Safe Zone Z > 2.99 (public) or Z' > 2.90 (private). The company shows healthy financial ratios consistent with low near-term bankruptcy probability. Altman's original research found that companies with Z above this threshold did not go bankrupt within two years.

Show all 9 terms

Grey Zone Z between 1.81 and 2.99 (public) or Z' between 1.23 and 2.90 (private). Inconclusive zone — the model's predictive accuracy is lower here. Financial conditions warrant close monitoring and deeper qualitative analysis.

Distress Zone Z < 1.81 (public) or Z' < 1.23 (private). Altman found that companies in this range faced significantly elevated bankruptcy risk. A result below this threshold does not guarantee failure but is a strong warning signal that merits further due diligence.

Book Value of Equity The net asset value of shareholders' equity as reported on the balance sheet — Total Assets minus Total Liabilities. Used in the private model as a proxy for market capitalisation, since private companies do not have an observable stock price.

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Manufacturing Company — Grey Zone

A mid-size public manufacturer reports: Working Capital $2M, Total Assets $10M, Retained Earnings $1.5M, EBIT $1M, Market Cap $4M, Total Liabilities $6M, Sales $8M.

Working Capital $2,000,000 Total Assets $10,000,000 Retained Earnings $1,500,000 EBIT $1,000,000 Market Cap $4,000,000 Total Liabilities $6,000,000 Annual Sales $8,000,000

Z ≈ 1.98 — Grey Zone. The company is not immediately at risk but sits in the warning area, primarily because of the high debt load (X₄ = 0.67) and modest retained earnings (X₂ = 0.15). Management should focus on reducing liabilities or improving profitability to push the Z-Score above 2.99.

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Service Company — Safe Zone

A private service firm reports: Working Capital $1M, Total Assets $5M, Retained Earnings $500K, EBIT $600K, Book Value of Equity $2M, Total Liabilities $3M (no sales input for the private model).

Working Capital $1,000,000 Total Assets $5,000,000 Retained Earnings $500,000 EBIT $600,000 Book Value of Equity $2,000,000 Total Liabilities $3,000,000

Z' ≈ 3.14 — Safe Zone. Solid profitability (X₃ = 0.12), reasonable leverage (X₄ = 0.67), and positive retained earnings drive the score comfortably above the 2.90 threshold. The model considers this company financially stable with low near-term insolvency risk.

The Altman Z-Score is one of the most widely used quantitative tools for assessing corporate bankruptcy risk. Developed by NYU Professor Edward Altman in 1968 using discriminant analysis on 66 manufacturing firms, it distills five balance-sheet ratios into a single score that has demonstrated roughly 80–90% accuracy in predicting bankruptcy two years in advance.

How the model works

Altman trained the original model on 33 bankrupt and 33 non-bankrupt manufacturing companies, using multivariate discriminant analysis to find the weighted combination of financial ratios that best separated the two groups. The five ratios — liquidity (X₁), cumulative profitability (X₂), operating profitability (X₃), financial leverage (X₄), and asset turnover (X₅) — were chosen because they each capture a distinct dimension of financial health.

In 1983, Altman revised the model for private companies (replacing market equity with book equity) and again in 1995 for non-manufacturing companies (removing the Sales/Assets ratio). The thresholds and coefficients differ between models, so always use the version that matches the company type.

What moves the score most

The EBIT/Assets ratio (X₃) carries the largest coefficient in both models and therefore has the most influence on the Z-Score. A company that improves operating margins — even without paying down debt — will see its Z-Score rise sharply. The Equity/Liabilities ratio (X₄) is the second-most impactful lever: deleveraging, raising equity capital, or simply having a higher market capitalisation significantly reduces apparent bankruptcy risk.

Retained Earnings (X₂) accumulate slowly over time, so this ratio tends to reward mature, consistently profitable companies and penalise younger ones regardless of current performance. This means the Altman Z-Score is not always appropriate for early-stage companies or firms undergoing major restructuring.

Limitations and when to use additional tools

The Z-Score was designed for US manufacturing companies in the 1960s and performs best in that context. Accuracy degrades for financial institutions (whose balance sheets are structurally different), utilities, real estate companies, and early-stage firms. The model also uses historical accounting data, which can lag real-time deterioration and is subject to earnings management.

Use the Z-Score as a screening tool and an early warning signal, not as a definitive verdict. A distress-zone score warrants deeper analysis — cash-flow modelling, debt-covenant review, and qualitative assessment of management and industry conditions — before drawing conclusions. Always combine quantitative screening with current market information and analyst judgement.

What does the Altman Z-Score actually predict?+

The Altman Z-Score estimates the probability that a company will enter bankruptcy within the next two years. Altman's original research found that the model correctly classified about 95% of companies in the training sample one year before bankruptcy and approximately 83% two years before. Real-world accuracy varies by industry, time period, and how the thresholds are applied, but the Z-Score remains one of the most empirically validated single-number bankruptcy predictors available.

Which model should I use — public or private?+

Use the Public Manufacturing model for publicly traded companies in manufacturing industries, where market capitalisation is observable and the Sales/Assets ratio is meaningful. Use the Private / Service model for private companies (no market price available), or for non-manufacturing businesses in sectors like retail, technology, or services, where the asset-turnover ratio is less discriminating. If the company is public but in a service industry, either model can be applied, but the private/service model's thresholds tend to be more calibrated.

Can the Z-Score be negative?+

Yes. A company with severely negative working capital, large cumulative losses (negative retained earnings), or negative EBIT can produce a negative Z-Score. Any score below the distress threshold (1.81 for the public model, 1.23 for the private model) indicates high bankruptcy risk; a negative score simply means the distress signals are extreme. The solvency gauge clamps the needle at the left edge for very low scores.

How do I share my results?+

Click the Share button in the action bar. The calculator encodes all current inputs into the URL hash, so anyone who opens that link will see exactly the same scenario you computed. You can also use Copy to copy a text summary of the result, or CSV to download the inputs and factors as a spreadsheet.

Where does the formula come from?+

The original Z-Score formula was published by Edward Altman in the Journal of Finance (September 1968): 'Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.' The revised Z'-Score for private companies appeared in Altman's 1983 book Corporate Financial Distress. Both models have been extensively replicated and remain the most widely cited academic bankruptcy-prediction frameworks.

Altman Z-Score Calculator

Financial Inputs

Altman Z-Score

Factor Sensitivity Tornado

Methodology & Professional Guidance

Academic Foundation

Known Limitations

Professional Disclaimer

How to Use This Calculator

Select your company type

Enter the financial inputs from the balance sheet

Read the Z-Score and solvency zone

Use Scenario Analysis to stress-test

Formula & Methodology

Trust, Methodology & Sources

Key Terms Explained

Real-World Examples

Manufacturing Company — Grey Zone

Service Company — Safe Zone

Understanding the Altman Z-Score

How the model works

What moves the score most

Limitations and when to use additional tools

Frequently Asked Questions

Altman Z-Score Calculator

Financial Inputs

Altman Z-Score

Factor Sensitivity Tornado

Methodology & Professional Guidance

Academic Foundation

Known Limitations

Professional Disclaimer

How to Use This Calculator

Select your company type

Enter the financial inputs from the balance sheet

Read the Z-Score and solvency zone

Use Scenario Analysis to stress-test

Formula & Methodology

Trust, Methodology & Sources

Key Terms Explained

Real-World Examples

Understanding the Altman Z-Score

How the model works

What moves the score most

Limitations and when to use additional tools

Frequently Asked Questions

Keep Exploring

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