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Stock analysis model

Altman Z-Score

The Altman Z-Score combines five weighted financial ratios to estimate the likelihood of financial distress. It focuses on liquidity, retained profitability, operating performance, leverage and asset efficiency.

When Altman Z-Score is useful

  • Adding a financial distress check to fundamental stock research.
  • Comparing balance-sheet strength among established operating companies.
  • Identifying companies that may require deeper credit and liquidity analysis.

Limitations to consider

  • Different versions of the formula are intended for different company types.
  • The model was not designed as a precise short-term bankruptcy prediction tool for every industry.
  • Accounting quality, unusual events and sector characteristics can distort the result.

How the model works

  1. 1Calculate working capital divided by total assets.
  2. 2Calculate retained earnings divided by total assets.
  3. 3Calculate EBIT divided by total assets.
  4. 4Calculate market value of equity divided by total liabilities.
  5. 5Calculate sales divided by total assets.
  6. 6Apply the formula's weights and sum the five components.

How to interpret the result

For the original public-manufacturer formula, a score above roughly 3.0 is commonly associated with lower distress risk, while a score below roughly 1.8 signals elevated risk. The grey zone between them requires additional analysis, and thresholds vary by formula version.

Frequently asked questions

What is a good Altman Z-Score?

Under the original formula, scores above about 3.0 are generally viewed as financially safer, while scores below about 1.8 indicate elevated distress risk.

Does a low Z-Score mean bankruptcy is certain?

No. It is a warning indicator based on financial ratios, not a certainty. Investors should also examine liquidity, debt maturities, cash flow and industry conditions.

Can the Altman Z-Score be used for banks?

It is generally less suitable for banks and other financial companies because their balance sheets and regulatory capital structures differ substantially from industrial companies.

Learn the method in context

Go beyond the score with worked explanations, assumptions and common mistakes in the Stock Insights Academy.

Read the related Academy guide

Apply Altman Z-Score to a stock

Use Stock Insights to combine this model with additional valuation and financial health checks.

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