The Altman Z-Score combines five weighted financial ratios — working capital, retained earnings, operating earnings, market value, and sales, each scaled against total assets or liabilities — into a single score that predicts the likelihood of financial distress within two years.
The formula
5 Weighted RatiosTotal Assets / Liabilities
= Z-Score
Why it matters
- —Originally built to predict corporate bankruptcy, and still one of the most-tested distress models in finance.
- —A falling Z-Score over several quarters is often a leading indicator of trouble, even when headline profit still looks fine.
- —Works best for industrial and manufacturing companies — less reliable for financials, where the balance sheet structure is fundamentally different.
How to read it
| < 1.81 | Distress zone — significant bankruptcy risk |
| 1.81–2.99 | Grey zone — elevated but not critical risk |
| > 2.99 | Safe zone — low bankruptcy risk |