Altman Z-Score Calculator
Calculate the Altman Z-Score to predict the probability of corporate bankruptcy. This model uses multiple financial ratios to assess a company's financial health and bankruptcy risk.
Financial Statement Data
Z-Score Results
Altman Z-Score:
0.000
Bankruptcy Risk:
N/A
Financial Health:
N/A
Component Analysis
Liquidity Ratio (X1):
0.000
Profitability (X2):
0.000
Efficiency (X3):
0.000
Leverage (X4):
0.000
Activity (X5):
0.000
Risk Assessment
Confidence Level:
N/A
Time Horizon:
N/A
Investment Action:
N/A
Understanding the Altman Z-Score
The Altman Z-Score is a financial model developed by Edward Altman in 1968 to predict the probability of corporate bankruptcy. It combines five financial ratios into a single score that indicates a company's financial health and likelihood of default.
Altman Z-Score Formula
Original Z-Score Model
- Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
- X1 = Working Capital / Total Assets
- X2 = Retained Earnings / Total Assets
- X3 = EBIT / Total Assets
- X4 = Market Value Equity / Book Value Debt
- X5 = Sales / Total Assets
Z-Score Interpretation
- Z > 3.0: Safe zone (low bankruptcy risk)
- 1.8 < Z < 3.0: Grey zone (moderate risk)
- Z < 1.8: Distress zone (high bankruptcy risk)
- Higher scores indicate better financial health
Component Analysis
Z-Score Components Explained
Understanding each ratio's contribution to bankruptcy prediction
Liquidity (X1)
- Measures short-term financial health
- Working capital relative to total assets
- Weight: 1.2 (importance in model)
- Higher values indicate better liquidity
Profitability (X2)
- Cumulative profitability over time
- Retained earnings to total assets
- Weight: 1.4 (highest weight)
- Reflects ability to generate profits
Efficiency (X3)
- Operating efficiency
- EBIT relative to total assets
- Weight: 3.3 (most important)
- Highest weighted component
Leverage (X4)
- Financial leverage and solvency
- Market value equity to book debt
- Weight: 0.6 (lowest weight)
- Market perception of financial health
Activity (X5)
- Asset utilization efficiency
- Sales relative to total assets
- Weight: 1.0 (moderate weight)
- Revenue generation capability
Model Accuracy and Limitations
| Aspect | Strength | Limitation |
|---|---|---|
| Predictive Accuracy | 72-80% accuracy in original study | Accuracy varies by industry and time |
| Time Horizon | Predicts bankruptcy 1-2 years ahead | Not useful for very short-term predictions |
| Industry Application | Works well for manufacturing firms | Less accurate for financial and service firms |
Applications in Finance
Credit Analysis
- Bank lending decisions
- Bond rating assessments
- Credit risk evaluation
- Loan pricing
Investment Decisions
- Stock selection criteria
- Portfolio risk assessment
- Distressed securities investing
- Risk management
Industry-Specific Considerations
Manufacturing Sector
- Original model works well
- High predictive accuracy
- Asset-intensive operations
- Traditional capital structure
Service Industries
- Lower predictive power
- Different capital structures
- Intangible assets
- Adjusted models needed
Z-Score vs Other Models
Advantages
- Multiple financial ratios
- Empirically tested
- Easy to calculate
- Industry standard
Alternatives
- Ohlson O-Score
- Zmijewski Score
- Neural network models
- Machine learning approaches
Key Takeaways for Altman Z-Score Calculator
- Altman Z-Score = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 predicts corporate bankruptcy probability
- Z > 3.0 indicates low bankruptcy risk, Z < 1.8 indicates high risk, and 1.8-3.0 is the grey zone
- The model combines liquidity, profitability, efficiency, leverage, and activity ratios
- EBIT/Total Assets (X3) has the highest weight (3.3) in the model
- Z-Score is most accurate for manufacturing companies and has 72-80% predictive accuracy
- The model predicts bankruptcy 1-2 years in advance
- Use Z-Score for credit analysis, investment decisions, and risk assessment
- Consider industry differences when interpreting Z-Score results