The Altman Z-Score is a single number built from five financial ratios, designed to show how close a company's finances are to distress. Edward Altman published the original formula in 1968, based on manufacturing companies that were listed on a stock exchange. The five ratios compare working capital, retained earnings, operating profit (EBIT) and sales with total assets, and the market value of the shares with total liabilities. Each ratio is multiplied by a fixed weight and the results are added up. In the original version a score above 2.99 falls in the "safe" zone, between 1.81 and 2.99 in the "grey" zone and below 1.81 in the "distress" zone (many sources round these to 3.0 and 1.8). Altman later published variants for private companies and for non-manufacturing companies, with different weights and different cut-offs.
Worked example
Company A (figures in millions of dollars) has total assets of 1,000, working capital of 200 (current assets minus current liabilities), retained earnings of 300, EBIT of 100, shares worth 500 on the stock market, total liabilities of 400 and sales of 900. The five ratios are 200 ÷ 1,000 = 0.20, 300 ÷ 1,000 = 0.30, 100 ÷ 1,000 = 0.10, 500 ÷ 400 = 1.25 and 900 ÷ 1,000 = 0.90. Z = 1.2 × 0.20 + 1.4 × 0.30 + 3.3 × 0.10 + 0.6 × 1.25 + 1.0 × 0.90 = 0.24 + 0.42 + 0.33 + 0.75 + 0.90 = 2.64. That lands in the grey zone, between 1.81 and 2.99, so the sensible next step is to look at which of the five ratios pulls the score down and why.
Why it matters
The Z-Score is a quick screen for a question every investor and lender asks: could this company run into trouble paying what it owes? The figures come from the balance sheet, the income statement and the share price. The limits matter. The weights were fitted in the 1960s on a sample of listed manufacturers, so the original formula fits other kinds of company less well, and banks and insurers do not suit it at all because their balance sheets work differently. One input is the market value of the shares, so the score moves whenever the share price moves. The result is a screen, not a forecast: a low score is a question to look into, and a high score does not rule out trouble. Use the variant that matches the company (listed manufacturer, private company or non-manufacturer), and read the score together with debt, cash flow and interest coverage.
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Frequently asked questions
In the original formula for listed manufacturers, a score above 2.99 is called the safe zone, 1.81 to 2.99 the grey zone and below 1.81 the distress zone. Some sources round these to 3.0 and 1.8. Treat the zone as a question to look into rather than a verdict, and use the cut-offs of the variant that fits the company.
Z = 1.2 × A + 1.4 × B + 3.3 × C + 0.6 × D + 1.0 × E. A is working capital divided by total assets, B is retained earnings divided by total assets, C is EBIT divided by total assets, D is the market value of equity divided by total liabilities and E is sales divided by total assets. This is the 1968 version for listed manufacturers.
Altman published a variant for private companies, which uses book value of equity instead of market value, and one for non-manufacturers, with different weights and cut-offs. Banks and insurers are generally not a good fit for any version, because their balance sheets are built differently.
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Built & maintained by Worthmap · Last updated November 1, 2026
Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.