Formula, calculation and example
Altman Z″
Stock Insights uses the four-factor Altman Z-double-prime (Z″) financial-distress model for non-financial operating companies. It requires reported working-capital, retained-earnings, operating-profitability and balance-sheet leverage inputs and does not substitute cash, net income or other proxy values when a required statement item is unavailable.
Altman Z″ formula
Z″ = 6.56X₁ + 3.26X₂ + 6.72X₃ + 1.05X₄X₁ is working capital divided by total assets, X₂ retained earnings divided by total assets, X₃ EBIT divided by total assets and X₄ book value of equity divided by total liabilities. Working capital is current assets minus current liabilities.
Key inputs
- X₁: Working capital / total assets
- Current assets minus current liabilities, divided by total assets. This captures short-term balance-sheet liquidity relative to the asset base.
- X₂: Retained earnings / total assets
- Reported retained earnings divided by total assets, measuring accumulated internally financed profitability.
- X₃: EBIT / total assets
- Earnings before interest and taxes divided by total assets, measuring operating earning power before financing costs.
- X₄: Book equity / total liabilities
- Reported book value of equity divided by total liabilities, measuring the accounting equity cushion relative to obligations.
Altman Z″ calculation example
- 1Assume current assets of 500, current liabilities of 300 and total assets of 1,000. X₁ = (500 − 300) / 1,000 = 0.20.
- 2Assume retained earnings of 200. X₂ = 200 / 1,000 = 0.20.
- 3Assume EBIT of 150. X₃ = 150 / 1,000 = 0.15.
- 4Assume book equity of 600 and total liabilities of 400. X₄ = 600 / 400 = 1.50.
- 5Apply the weights: 6.56×0.20 + 3.26×0.20 + 6.72×0.15 + 1.05×1.50.
The resulting Altman Z″ score is approximately 4.55, which is above the model's 2.6 upper grey-zone threshold. The score remains a financial-distress screening signal rather than a bankruptcy probability.
When Altman Z″ is useful
- Adding a consistent financial-distress screen to research on non-financial operating companies.
- Comparing balance-sheet resilience when all required reported statement items are available.
- Flagging companies that may warrant deeper liquidity, leverage and debt-maturity analysis.
Limitations to consider
- Stock Insights does not apply Altman Z″ to financial businesses such as banks and insurers because their balance sheets and regulatory capital structures are fundamentally different.
- A missing current-assets, current-liabilities, retained-earnings, EBIT, total-assets, book-equity or total-liabilities input makes the model unavailable rather than triggering a proxy value.
- The score is a statistical distress screen, not a bankruptcy probability, credit rating or guarantee that a company is financially safe.
How to calculate Altman Z″
- 1Confirm that the company is a non-financial operating business.
- 2Collect current assets, current liabilities, retained earnings, EBIT, total assets, book equity and total liabilities from reported financial statements.
- 3Calculate working capital as current assets minus current liabilities.
- 4Calculate X₁ through X₄ using the denominators defined by the Z″ model.
- 5Multiply each ratio by its Z″ coefficient and add the four weighted components.
- 6Interpret scores below 1.1 as the distress zone, 1.1 to below 2.6 as the grey zone and 2.6 or above as above the grey zone.
- 7Use the result alongside cash flow, debt maturities, covenants and sector-specific analysis.
How to interpret the result
Stock Insights classifies Altman Z″ scores below 1.1 as the distress zone, scores from 1.1 to below 2.6 as the grey zone and scores of 2.6 or more as above the grey zone. The upper band is deliberately not labelled a guarantee of safety: the model is a screening tool and should be combined with broader fundamental analysis.
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Frequently asked questions
What Altman formula does Stock Insights use?
Stock Insights uses Altman Z-double-prime: Z″ = 6.56X₁ + 3.26X₂ + 6.72X₃ + 1.05X₄, with working capital, retained earnings, EBIT, book equity, total assets and total liabilities taken from reported statements.
What are the Altman Z″ thresholds?
Stock Insights treats scores below 1.1 as the distress zone, 1.1 to below 2.6 as the grey zone and 2.6 or above as above the grey zone.
Why does Stock Insights use Z″ instead of the original five-factor Z-Score?
Z″ removes the sales-to-assets factor and is better suited to applying one consistent Altman framework across a broader set of non-financial operating companies. Financial companies remain excluded.
Why can Altman Z″ be unavailable for a stock?
The calculation requires current assets, current liabilities, retained earnings, EBIT, total assets, book equity and total liabilities. Stock Insights returns the model as unavailable when any required reported input is missing instead of silently substituting another metric.
Can Altman Z″ be used for banks or insurers?
Stock Insights does not apply the model to financial businesses such as banks and insurers because their leverage, asset structure and regulatory capital make the standard corporate distress ratios unsuitable.
Learn the method in context
Go beyond the formula with worked explanations, assumptions and common mistakes in the Stock Insights Academy.
Read the related Academy guideApply Altman Z″ to a stock
Use Stock Insights to combine this model with additional valuation and financial health checks.
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