The Altman Z-Score is a financial metric used to predict the likelihood of a company going bankrupt within the next two years. Developed by Edward I. Altman in 1968, it combines five financial ratios to produce a single score that indicates the financial health of a company.
Formulas and Their Meanings
The Altman Z-Score formula varies depending on the type of company:
\(X_3\) = Earnings Before Interest and Taxes (EBIT) / Total Assets
\(X_4\) = Market Value of Equity / Total Liabilities
\(X_5\) = Sales / Total Assets
Interpretation of Z-Score
The interpretation of the Z-Score varies slightly depending on the company type:
For Public Companies:
Z > 2.99 - "Safe" Zone
1.81 < Z < 2.99 - "Grey" Zone
Z < 1.81 - "Distress" Zone
For Private Companies:
Z > 2.9 - "Safe" Zone
1.23 < Z < 2.9 - "Grey" Zone
Z < 1.23 - "Distress" Zone
For Non-Manufacturing Companies:
Z > 2.6 - "Safe" Zone
1.1 < Z < 2.6 - "Grey" Zone
Z < 1.1 - "Distress" Zone
Calculation Steps
Gather the necessary financial data from the company's balance sheet and income statement.
Calculate each of the five financial ratios (X1 through X5).
Multiply each ratio by its corresponding coefficient in the Z-Score formula.
Sum up the results to get the final Z-Score.
Interpret the Z-Score based on the company type and the corresponding zones.
Visual Representation
This scatter plot represents the example dataset. The red dashed line indicates the mean (5), and the spread of points illustrates the standard deviation.
Need a Custom Calculator?
We can create a free, personalized calculator just for you!