Definition

Altman Z-score

Contributor(s): Ben Cole

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. 

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.

 

This was last updated in December 2014

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