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.