Altman Z-Score

Definition

The Altman Z-Score is a bankruptcy-risk formula developed by NYU professor Edward Altman in 1968. It combines five financial ratios — covering liquidity, profitability, leverage, solvency, and asset efficiency — into a single weighted score, then bands the result into three zones: Safe, Grey, and Distress. It's a snapshot of financial soundness at a single point in time, not a trend — for that, pair it with the Piotroski F-Score.

Formula

Z = 1.2·X1 + 1.4·X2 + 3.3·X3 + 0.6·X4 + 1.0·X5
X1 = Working Capital ÷ Total Assets — short-term liquidity relative to company size
X2 = Retained Earnings ÷ Total Assets — how much of the balance sheet was built from cumulative profit versus borrowed or issued capital
X3 = EBIT ÷ Total Assets — core operating profitability relative to the asset base
X4 = Market Value of Equity ÷ Total Liabilities — the market's own vote of confidence, weighed against everything the company owes
X5 = Sales ÷ Total Assets — how efficiently assets are converted into revenue

This is the original public-company version of the formula (Altman's 1968 model), which uses live market capitalisation for X4. Two later variants — Z′ for private companies and Z″ for non-manufacturers — substitute book value of equity and drop X5, since neither a market price nor a single manufacturing-style asset-turnover ratio applies cleanly to every business.

How to interpret it

Above 2.99
Safe Zone — low bankruptcy risk based on these five ratios
1.81 to 2.99
Grey Zone — some financial stress signals present, not a clear read either way
Below 1.81
Distress Zone — the model flags meaningful bankruptcy risk based on this ratio mix

Worked example

Worked example

Working Capital ÷ Total Assets (X1)0.20
Retained Earnings ÷ Total Assets (X2)0.30
EBIT ÷ Total Assets (X3)0.09
Market Value of Equity ÷ Total Liabilities (X4)3.33
Sales ÷ Total Assets (X5)0.64
Z = 1.2(0.20) + 1.4(0.30) + 3.3(0.09) + 0.6(3.33) + 1.0(0.64)3.60
A Z-Score of 3.60 clears the 2.99 Safe Zone threshold. Note how much X4 contributes here (0.6 × 3.33 = 2.0, over half the total) — a low-debt company with a market cap well above its total liabilities can push Z well into Safe territory even with modest operating margins, which is exactly what this ratio is designed to capture: the market pricing in low leverage risk.

Common mistakes

Using book value of equity instead of market cap for X4
The "Market Value of Equity" in X4 is share price × shares outstanding, not shareholders' equity from the balance sheet — using book value understates X4 for any company trading above book, pulling Z-Score down artificially.
Applying the classic formula to banks, insurers, or REITs
These businesses carry leverage as part of the business model itself (a bank's deposits are liabilities by design), so Working Capital and Equity/Liabilities ratios don't mean the same thing they do for an operating company. The formula was built and validated on manufacturers and general operating companies.
Reading a Grey Zone score as "about to go bankrupt"
Grey Zone (1.81–2.99) means the ratio mix is ambiguous, not that failure is imminent — many stable companies sit here for years. Distress Zone is the stronger signal, and even then it's one model's read of five ratios, not a certainty.
Treating an extremely high Z-Score as "zero risk"
A very high X4 (market cap far exceeding total liabilities) can push Z into the double digits for a richly-valued, low-debt company. That reflects low leverage risk specifically — it says nothing about valuation risk, competitive risk, or any factor outside these five ratios.
Using a single year's ratios without checking the trend
Z-Score is a snapshot — a company can sit in the Safe Zone while its underlying fundamentals are actively deteriorating year over year. Pair it with the Piotroski F-Score, which is built specifically to catch that kind of trend.

Frequently asked questions

What is a good Altman Z-Score?

A Z-Score above 2.99 falls in the Safe Zone, the band the original research associated with the lowest bankruptcy risk among the companies studied. 1.81 to 2.99 is the Grey Zone (ambiguous), and below 1.81 is the Distress Zone (the model flags meaningful risk). These are statistical zones from historical data, not guarantees.

What does a negative Altman Z-Score mean?

A negative Z-Score falls well within the Distress Zone (below 1.81) and usually reflects negative retained earnings, negative EBIT, or both — either can pull the score sharply down since they're weighted 1.4x and 3.3x respectively.

Does the Altman Z-Score work for banks and financial companies?

No. Banks, insurers, and REITs carry leverage as a structural part of their business model, which makes Working Capital/Total Assets and Equity/Liabilities mean something different than for an operating company. KashVector's Solvency Check excludes these sectors from both scores for this reason.

What's the difference between Altman Z-Score and Piotroski F-Score?

Z-Score is a snapshot: one point-in-time formula answering "how much bankruptcy risk does this ratio mix suggest right now?" F-Score is a trend: a 9-point year-over-year checklist answering "did the fundamentals get better or worse this year?" A company can sit in Z's Grey Zone while F says it's clearly improving, or the reverse — that divergence is informative, not a contradiction to resolve.

Is the Altman Z-Score still used today?

Yes, widely, both by academics and in fundamental analysis — but Edward Altman's original model dates to 1968 and was built and validated on manufacturing companies of that era. Modern variants (Z′, Z″) adapt it for private companies and non-manufacturers; KashVector uses the original public-company formula.

Related terms

Piotroski F-ScoreDebt-to-Equity RatioCurrent RatioAll terms →
Run a Solvency Check on any stockRead about the Piotroski F-Score