The Altman Z-score is a statistic that is useful for evaluating the financial health of a publicly traded manufacturing company.
In statistics, a z-score indicates how many standard deviations an element is from the mean. The Altman Z-score quantifies how closely a company resembles other companies that have filed for bankruptcy. The score is calculated using financial data found on a company's annual 10K report. The lower a company's Altman Z-score, the higher the possibility the company will go bankrupt. A company with a score below 1.8 is considered to have a high risk of bankruptcy. Ideally, a company's Z-score should be well above 3.
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The Altman Z-score is calculated using the equation: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E, where:
- A = working capital/total assets
- B = retained earnings/total assets
- C = earnings before interest and taxes/total assets
- D = market value of equity/total liabilities
- E = sales/total assets
New York University Professor Edward Altman developed the Altman Z-score formula in 1967. In 2012, Altman developed an updated version called the Altman Z-score Plus that can be used to evaluate a wider range of companies beyond the manufacturing industry.