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What is the Altman Z-Score?

The Altman Z-Score blends several financial ratios into one number describing how closely a company's accounts resemble those of companies that went bankrupt. It is a statistical picture of a balance sheet, not a forecast that any particular company will fail.

Where it comes from

Edward Altman, a finance professor, built the model in 1968. He compared manufacturing companies that had filed for bankruptcy with similar companies that had not, and found the combination of ratios that best separated the two groups.

The original formula

Z = 1.2 × working capital ÷ total assets + 1.4 × retained earnings ÷ total assets + 3.3 × operating income ÷ total assets + 0.6 × market value of equity ÷ total liabilities + 1.0 × revenue ÷ total assets.

For this model a score above 2.99 is the safe zone, 1.81 to 2.99 the grey zone, and below 1.81 the distress zone.

  • Working capital to assets measures short-term liquidity.
  • Retained earnings to assets measures accumulated profitability, and indirectly how long a company has been profitable.
  • Operating income to assets measures current earning power.
  • Market value to liabilities measures how far the value of the shares could fall before liabilities exceeded assets.
  • Revenue to assets measures how hard the assets are working.

The variants WylthIQ uses

The original was fitted on manufacturers with a share price. Altman later published two revisions, and WylthIQ picks whichever of the three fits the company.

  • Z′, for manufacturers when no share price is available, uses book equity in place of market value, with weights of 0.717, 0.847, 3.107, 0.420 and 0.998. It is safe above 2.9 and in distress below 1.23.
  • Z″, for non-manufacturers, drops the revenue-to-assets term, which varies too much between industries, and uses weights of 6.56, 3.26, 6.72 and 1.05. It is safe above 2.6 and in distress below 1.1.
  • Banks and insurers get no Z-Score. Their balance sheets have no working capital to measure and are built on borrowing, so the model would call every healthy bank distressed.

What it does not tell you

A Z-Score is a useful prompt and a poor verdict.

  • It describes the shape of a balance sheet today. It was not designed to time a failure.
  • Companies that repurchase many shares carry lower retained earnings and book equity, which pulls the book-value variant down without the business changing.
  • It was fitted on data from decades ago and on particular kinds of company. A service business can sit in the grey zone for years quite comfortably.
  • A grey or distress reading is a reason to read the debt notes and the cash position closely, not a conclusion in itself.

Apply it

See the idea on real companies

Related explanations

What each figure is, how it is worked out, and where it misleads

Altman Z-ScoreCurrent ratioNet debtDebt to equity

Common questions

What does a distress-zone reading mean?
That the company's ratios resemble those of companies that went bankrupt in the data the model was built on. It is a prompt to look at when debt falls due, how much cash is held, and whether interest is comfortably covered. Many companies spend time in the distress zone and do not fail.
Why is there no Z-Score for banks?
A bank's balance sheet has no split between short-term and long-term items, so there is no working capital to measure, and borrowing is the business itself. The model would read every healthy bank as distressed, so WylthIQ omits it for financial companies and says so.
Why does the score differ from one website to another?
Sites use different variants, different definitions of the inputs — market or book value of equity, which measure of operating income — and figures from different dates. WylthIQ names the variant it used beside the score.

Educational information only — not investment advice. Every figure on a WylthIQ company page links to the filing it came from.