This Altman Z-score calculator compresses five balance-sheet ratios into one bankruptcy-risk score — Edward Altman’s 1968 model — and places the company in the safe, grey or distress zone lenders have used for half a century.

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Five Ratios, One Verdict, Fifty Years of Use

In 1968 Edward Altman did something new: instead of judging companies ratio by ratio, he let statistics choose the combination. From 22 candidate ratios measured on matched pairs of bankrupt and healthy manufacturers, discriminant analysis distilled five, weighted by their separating power: Z = 1.2·X1 + 1.4·X2 + 3.3·X3 + 0.6·X4 + 1.0·X5 — liquidity (working capital/assets), cumulative profitability (retained earnings/assets), operating productivity (EBIT/assets, weighted heaviest at 3.3), the market’s cushion (market value of equity/total liabilities), and asset turnover (sales/assets). The worked example here — a comfortably profitable manufacturer — scores Z = 3.32, safe zone. The zones Altman published: above 2.99 “safe,” 1.81–2.99 the grey zone where the model honestly abstains, below 1.81 “distress.” In his original test the score classified firms correctly about 95% of the time one year before bankruptcy and ~83% two years out — performance that kept the model in credit departments, audit firms and textbooks for over five decades, long after most 1960s models were forgotten.

Using Z well means respecting what it is. It is a pattern classifier trained on a population — 1960s US public manufacturers — not a law of physics: applying the original coefficients to a software company, a bank, or a private firm strains the calibration, which is why Altman himself published the Z′ (private firms, book equity) and Z″ (non-manufacturers, no turnover term, different zone cutoffs at 2.6/1.1) variants, plus an emerging-market version. Financial firms are excluded entirely — their balance sheets invert the ratios’ meanings. Within its home turf, though, Z remains a superb first screen and trend tool: a supplier, customer or acquisition target sliding from 3.4 to 2.2 to 1.6 across three years is telling a story no single ratio tells as loudly, and credit analysts act on the trajectory before the level crosses 1.81. The score is not a probability — converting Z to a default likelihood requires the bond-rating equivalents Altman published later — but as an ordinal health grade from public statements, nothing simpler has displaced it.

Worked Examples (Verified)

  • Defaults: X1 0.20, X2 0.30, X3 0.15, X4 1.60, X5 1.20 → Z = 0.24 + 0.42 + 0.495 + 0.96 + 1.20 = 3.32 — SAFE.
  • Slipping firm: halve EBIT (X3 0.075) and retained earnings (X2 0.15), equity value cut to 0.8× liabilities → Z ≈ 2.38 — GREY.
  • Distress anatomy: negative working capital (X1 −0.10), negative retained earnings (X2 −0.20), EBIT −0.05, X4 0.3, X5 0.8 → Z ≈ 0.42 — deep DISTRESS.
  • Turnover’s quiet role: raising X5 from 1.2 to 2.2 (same assets, more sales) adds a full point of Z — asset sweating is bankruptcy protection.

Altman Z Discipline

  • Right model for the firm: original Z for public manufacturers; Z′ for private firms (book equity, cutoffs 2.90/1.23); Z″ for non-manufacturers/service firms (cutoffs 2.60/1.10); never for banks/insurers.
  • X4 uses MARKET value of equity in the original — a falling stock price mechanically lowers Z before the statements admit trouble; that’s a feature (the market smells it first), not a bug.
  • Trend beats level: three years of Z trajectory predict better than any single year’s zone.
  • Retained earnings (X2) penalizes young firms structurally — a healthy 3-year-old company carries little cumulative profit; interpret youth with care.
  • Z is a screen, not a sentence: grey-zone and distress results call for cash-flow analysis (can they pay Friday’s bills?), which a stock-based score cannot see.

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Frequently Asked Questions

How do you calculate the Altman Z-score?

Z = 1.2·X1 + 1.4·X2 + 3.3·X3 + 0.6·X4 + 1.0·X5, 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. The example here (0.20, 0.30, 0.15, 1.60, 1.20) scores 3.32. This calculator takes the seven raw statement figures and computes all five ratios and the score — the original 1968 public-manufacturer model, with its 2.99/1.81 zone cutoffs.

What is a good Altman Z-score?

Above 2.99 is the safe zone — bankruptcy unlikely on the model’s evidence. Between 1.81 and 2.99 is the grey zone: the model cannot confidently classify the firm, and roughly a watch-and-investigate verdict. Below 1.81 is distress — in Altman’s samples, firms there predominantly failed within two years. “Good” is therefore 3.0+, but context governs: a young firm scores structurally lower on retained earnings, and a firm at 2.5 but rising for three years is a different credit from one at 2.5 and falling.

How accurate is the Altman Z-score?

In Altman’s original study, ~95% correct classification one year before bankruptcy and ~83% two years before; later out-of-sample studies across decades and countries generally find 70–90% accuracy in the grey-inclusive sense — remarkable durability for a 1968 model, and the reason it survived. Accuracy decays with distance from its training population (manufacturers, public, US), which produced the Z′ and Z″ recalibrations. It is a screening instrument: superb at sorting obvious health from obvious distress, deliberately silent (grey zone) in between.

What is the difference between Z, Z′ and Z″?

Same idea, recalibrated coefficients for different populations. The original Z (this calculator) fits public manufacturers and uses market value of equity. Z′ fits PRIVATE firms — book value of equity substitutes for market value, coefficients change (0.717, 0.847, 3.107, 0.420, 0.998) and the safe/distress cutoffs move to 2.90/1.23. Z″ drops the sales/assets term (asset turnover varies too much by industry) for non-manufacturers and emerging markets, with cutoffs 2.60/1.10. Feeding a private service firm into the original Z is the most common misuse — the zones won’t mean what they claim.

Why does EBIT/assets carry the biggest weight (3.3)?

Because discriminant analysis found operating productivity the single strongest separator between firms that failed and firms that didn’t — ultimately, companies die when their asset base stops earning its keep, whatever their liquidity cosmetics. The weights are empirical, not theoretical: they are the coefficients that best split Altman’s 66-firm sample, which is also why recalibration changes them for other populations. X3’s dominance carries a practical lesson for analysts: when time is short, EBIT/TA is the ratio to compute first.

Can the Z-score be used for banks or retailers?

Banks and financial firms: no — leverage is their raw material, so X4 and the liability structure mean the opposite of what they mean for industrials; regulators use capital-adequacy frameworks instead. Retailers: cautiously — the original model is manufacturing-calibrated, and retail’s thin margins and negative-working-capital models (suppliers funding inventory) can depress X1 and X3 for perfectly healthy chains; Z″ is the better fit, and trend matters more than level. The model is a lens ground for one prescription; off-label use demands the recalibrated variants and humility.

Is the Z-score a probability of bankruptcy?

Not directly — it is a discriminant score, an ordering. Altman later published mappings from Z ranges to bond-rating equivalents and implied default experience, which practitioners use to translate. Treat the raw score as a grade (safe/grey/distress, plus trend), and if a probability is required, use the rating-equivalent tables or a market-based model (like Merton distance-to-default) designed for that output. Presenting “Z = 1.6, so 40% chance of failure” without the mapping is inventing precision the model doesn’t claim.

Is this Altman Z-score calculator free?

Yes — free, instant, no sign-up. Enter working capital, total assets, retained earnings, EBIT, market value of equity, total liabilities and sales for the Z-score, all five ratios and the risk zone.