Altman Z-score

Also called: z score, z-score, bankruptcy risk

A 1968 formula that combines five balance-sheet and profit ratios to estimate the risk of financial distress.

Formula

Z = 1.2×Working capital/Assets + 1.4×Retained earnings/Assets + 3.3×Operating profit/Assets + 0.6×Market value/Liabilities + 1.0×Sales/Assets

Worked example

1. Example plc, assuming retained earnings of $5bn and total liabilities of $10bn:
2. 1.2 × (2 ÷ 18) = 0.13
3. 1.4 × (5 ÷ 18) = 0.39
4. 3.3 × (2 ÷ 18) = 0.37
5. 0.6 × (40 ÷ 10) = 2.40
6. 1.0 × (10 ÷ 18) = 0.56

Result: ≈ 3.85 (safe)

How to read it

Above 2.99 safe, 1.81–2.99 grey zone, below 1.81 distress zone. Designed for industrial companies; not meaningful for banks.

See it with real numbers: Any company page → (free account)