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Altman Z-Score - Explained

What is the Altman Z - Score?

Written by Jason Gordon

Updated at October 21st, 2023

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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. 

Back to: RESEARCH, ANALYSIS, & DECISION SCIENCE

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. 


altman z-score z-score explanation

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