Altman Z-Score Calculator

The Altman Z-Score is a widely used financial model for estimating the likelihood that a company may face serious financial distress or bankruptcy. It condenses several balance sheet and income statement ratios into a single standardized score. This calculator uses the classic Altman Z-Score formula for publicly traded manufacturing companies and helps you quickly translate raw financial statement data into an easy-to-interpret risk indicator.

The model was developed by Professor Edward Altman in the late 1960s by analyzing a large sample of U.S. manufacturing firms, some of which later went bankrupt and some of which remained solvent. By comparing the financial characteristics of these firms, Altman identified a combination of ratios that best distinguished distressed companies from healthy ones. He then estimated statistical weights for each ratio, resulting in the well-known Z-Score formula.

While no single metric can fully capture a company’s financial health, the Altman Z-Score remains popular because it blends liquidity, profitability, leverage, and operating efficiency into one number. It is especially useful as an early-warning signal and as a screening tool in credit analysis, portfolio management, and internal risk monitoring.

Altman Z-Score Formula

This calculator implements the original Altman Z-Score model for publicly traded manufacturing companies. The formula combines five financial ratios, each multiplied by a specific coefficient and then summed to produce the Z-Score:

Altman Z-Score (original model):

where:

• X₁ = Working Capital / Total Assets
• X₂ = Retained Earnings / Total Assets
• X₃ = EBIT / Total Assets
• X₄ = Market Value of Equity / Total Liabilities
• X₅ = Sales / Total Assets

In expanded form:

All amounts should be taken from the same reporting period (typically the latest annual or trailing twelve-month financial statements) and expressed in the same currency. The calculator will form the ratios and apply the coefficients for you.

Understanding the Inputs

To use the calculator, you will need the following line items from your company’s balance sheet and income statement. Use consistent, up-to-date figures, ideally from audited or reviewed financial statements.

• Working Capital: Current assets minus current liabilities. This measures short-term liquidity and the ability to meet near-term obligations.
• Retained Earnings: Cumulative profits that have been reinvested in the business rather than paid out as dividends. This reflects the company’s historical profitability and ability to build a financial buffer over time.
• EBIT (Earnings Before Interest and Taxes): Operating profit before financing costs and income taxes. This captures the firm’s underlying earning power from its core activities.
• Market Value of Equity: For a public company, this is the current share price multiplied by the number of outstanding shares. It represents the market’s valuation of the company’s equity.
• Total Liabilities: All short-term and long-term obligations, including loans, accounts payable, and other debts.
• Sales: Total revenue over the selected period (usually one year or the last twelve months). This is used to measure how efficiently the company generates revenue from its asset base.
• Total Assets: The sum of all current and non-current assets. This is the denominator for most of the ratios in the model and represents the size of the company’s asset base.

For consistent results, use annual or trailing twelve-month figures for EBIT and Sales, and the corresponding period-end balance sheet amounts for Working Capital, Total Liabilities, and Total Assets. The model assumes a going-concern perspective rather than a liquidation basis.

How to Interpret the Altman Z-Score

The Z-Score maps onto three general risk zones. While thresholds can be interpreted flexibly, the classic cutoffs for the original model are:

• Z > 2.99: Safe Zone – Historically associated with a low probability of bankruptcy within roughly two years. Companies in this range typically show solid liquidity, profitability, and moderate leverage.
• 1.81 < Z < 2.99: Grey Zone – An intermediate range where the risk of distress is uncertain. Firms in this band should be monitored closely, with attention to trends in earnings, leverage, and cash flow.
• Z < 1.81: Distress Zone – Indicates a high statistical likelihood of financial distress or bankruptcy in Altman’s original research sample. Companies in this zone may face significant solvency concerns.

These ranges are not guarantees; they are guidelines based on historical patterns. A company in the distress zone may recover, and a company in the safe zone can still encounter problems if circumstances change abruptly. Always treat the Z-Score as a probabilistic indicator rather than a definitive prediction.

When reviewing your result, consider both the absolute level of the Z-Score and its direction over time. A declining score, even if still above 2.99, may signal emerging issues, whereas an improving score in the grey zone may indicate that turnaround efforts are taking hold.

Worked Example

Suppose you are analyzing a publicly traded manufacturing company with the following simplified annual financial data (all amounts in millions of dollars):

• Working Capital: 50
• Retained Earnings: 120
• EBIT: 40
• Market Value of Equity: 200
• Total Liabilities: 150
• Sales: 300
• Total Assets: 250

Step 1: Compute the five ratios.

• X₁ = Working Capital / Total Assets = 50 / 250 = 0.20
• X₂ = Retained Earnings / Total Assets = 120 / 250 = 0.48
• X₃ = EBIT / Total Assets = 40 / 250 = 0.16
• X₄ = Market Value of Equity / Total Liabilities = 200 / 150 ≈ 1.33
• X₅ = Sales / Total Assets = 300 / 250 = 1.20

Step 2: Apply the Altman coefficients.

• 1.2 × X₁ = 1.2 × 0.20 = 0.24
• 1.4 × X₂ = 1.4 × 0.48 = 0.672
• 3.3 × X₃ = 3.3 × 0.16 = 0.528
• 0.6 × X₄ = 0.6 × 1.33 ≈ 0.798
• 1.0 × X₅ = 1.0 × 1.20 = 1.20

Step 3: Sum the components to obtain Z.

Z ≈ 0.24 + 0.672 + 0.528 + 0.798 + 1.20 = 3.438

Interpretation: With a Z-Score of approximately 3.44, this company falls into the safe zone according to the classic thresholds. The model suggests a relatively low probability of bankruptcy in the near term, assuming conditions remain broadly similar. An analyst might still look at trends over several years and examine qualitative factors, but the Z-Score would not raise an immediate red flag.

Using the Z-Score in Practice

In real-world decision-making, the Altman Z-Score is typically used as one component of a broader credit or investment analysis. Common applications include:

• Credit risk assessment: Lenders and bond investors may use the Z-Score to flag borrowers that warrant closer review or more conservative terms.
• Portfolio screening: Equity investors sometimes use Z-Score thresholds to filter out the weakest companies or to identify potential turnaround candidates.
• Internal risk monitoring: Corporate finance teams and controllers may track the Z-Score over time as an early-warning indicator alongside leverage, coverage, and liquidity ratios.

After computing your company’s Z-Score with this calculator, consider the following next steps:

• If your score is in the safe zone, continue monitoring periodically and compare the score year over year.
• If your score is in the grey zone, investigate the drivers (e.g., low working capital, high leverage, weak profitability) and consider actions to strengthen the balance sheet or improve earnings.
• If your score is in the distress zone, consider engaging professional advisors, reviewing financing arrangements, and exploring operational or capital-structure changes.

Comparison with Other Z-Score Variants

Over time, Altman and other researchers have proposed variants of the original Z-Score to handle different types of firms. This calculator focuses on the original public-manufacturer model, but it is helpful to understand how it compares to other common versions at a high level.

If you are working with a private company, a financial institution, or a non-manufacturer, be aware that the original Z-Score model used here may be less accurate. In those cases, practitioners often turn to the alternative models above or to entirely different risk frameworks.

Limitations and Assumptions

The Altman Z-Score is a powerful tool, but it rests on specific assumptions and has important limitations. Understanding these will help you avoid over-reliance on a single metric.

• Calibration on historical data: The original model was calibrated on a sample of U.S. manufacturing firms from the mid-20th century. Capital structures, accounting standards, and economic conditions have evolved since then, which can affect how well the historical relationships hold today.
• Best suited to certain industries: The original Z-Score works best for asset-intensive manufacturing companies. It may be less suitable for financial institutions, early-stage startups, service firms with few tangible assets, or highly cyclical businesses where earnings fluctuate dramatically.
• Dependence on accounting quality: The score assumes that financial statements are prepared accurately and consistently. Aggressive accounting, off-balance-sheet obligations, or significant restatements can undermine the reliability of the inputs.
• Static snapshot: The model uses data from a specific point or period. It does not explicitly incorporate forward-looking information such as upcoming product launches, regulatory changes, or management actions that could materially alter risk.
• Probabilistic, not deterministic: A Z-Score in the distress zone does not guarantee bankruptcy, and a score in the safe zone does not ensure safety. The model indicates relative risk based on patterns observed in historical samples, not certainties for any individual firm.
• Not a substitute for professional advice: The Z-Score should be one input among many in a structured analysis. Important financing, investment, or restructuring decisions should be made with the assistance of qualified financial, legal, or accounting professionals.

Because of these limitations, treat the output of this calculator as an educational and indicative measure rather than a definitive risk rating. Combining the Z-Score with other ratios (such as interest coverage, debt-to-equity, and cash flow metrics) and with qualitative assessments (management quality, competitive position, industry outlook) will give you a more complete picture.

Important Disclaimer

This Altman Z-Score calculator is provided for informational and educational purposes only and does not constitute financial, investment, legal, or accounting advice. The model is based on historical research and may not accurately predict outcomes for any specific company. You should not rely on this tool as the sole basis for making lending, investment, or business decisions. Always consult with appropriately qualified professionals before taking action based on any financial analysis.