The Altman Z-Score
Despite the name, the Altman Z-Score isn’t a statistical z-score — it’s a corporate bankruptcy-prediction formula published by NYU professor Edward Altman in 1968, combining five balance-sheet ratios into one distress number. Same letter, different universe; this page exists because searchers land on both meanings.
| Ratio | What it measures |
|---|---|
| X₁ = Working capital / Total assets | Short-term liquidity |
| X₂ = Retained earnings / Total assets | Accumulated profitability & age |
| X₃ = EBIT / Total assets | Core earning power (heaviest weight) |
| X₄ = Market value of equity / Total liabilities | Market’s cushion vs debt |
| X₅ = Sales / Total assets | Asset efficiency |
Reading the score (original public-manufacturer model)
Z > 2.99 — safe zone; 1.81–2.99 — grey zone; Z < 1.81 — distress zone, historically elevated bankruptcy risk within two years. Altman later published variants for private firms (Z′) and non-manufacturers/emerging markets (Z″), with different weights and cutoffs — using the wrong variant is the most common misapplication.
Honest limitations
It’s a screening tool from 1968’s accounting world: it reads financial statements, so it inherits their lags and any window-dressing; it fits industrial balance sheets poorly onto banks and young tech firms; and a grey-zone score is a prompt for investigation, not a verdict. Used that way — as a fast, transparent first filter — it has stayed remarkably useful for over half a century.