Predict corporate bankruptcy risk using Altman's Z-Score model. Enter 7 financial metrics and instantly get the risk zone: Safe, Grey, or Distress.
Altman's Z-Score (1968) combines five accounting ratios, each capturing a different dimension of financial health. The formula was derived from discriminant analysis of 66 US manufacturing companies.
For private companies, Altman developed the Z'-Score variant (1983): X4 is replaced by Book Value of Equity / Total Liabilities (since market equity is unavailable). Thresholds shift: Safe > 2.9 | Grey 1.23–2.9 | Distress < 1.23. Coefficients also differ slightly.
The original model was validated on US manufacturing companies (1946–1965 data). It is less reliable for financial institutions, holding companies, real estate firms, and service businesses. Use alongside qualitative analysis, sector benchmarks, and credit agency ratings for robust assessments.
The Altman Z-Score is a quantitative financial model developed by NYU professor Edward Altman in 1968. It uses five accounting ratios to produce a single score predicting the probability of corporate bankruptcy within two years. The model achieved 95% accuracy in original testing on US manufacturing firms.
A Z-Score below 1.81 places a company in the Distress Zone, indicating high bankruptcy risk. The Grey Zone (1.81–2.99) is ambiguous — further analysis is required. A score above 2.99 is considered safe. These thresholds apply to the original public-company model; the Z'-Score for private companies uses different cutoffs.
No. The original model explicitly excludes financial institutions. Banks have fundamentally different capital structures (high leverage is normal) and regulatory frameworks that make the Z-Score ratios misleading. Altman developed separate models for non-manufacturing and emerging market firms.
With a coefficient of 3.3, X3 has the highest weighting because operating profitability is the most fundamental indicator of a company's ability to service its obligations. A company generating strong EBIT relative to its asset base is inherently more resilient than one dependent on financing or asset sales.
Altman's original research showed 95% accuracy one year prior to bankruptcy, and 72% accuracy two years prior. Accuracy degrades further in advance. The model's predictive power has held up over decades, but it must be used with caution for non-manufacturing or non-US companies.
A negative Z-Score is possible when ratios like X1, X2, or X3 are deeply negative (e.g., persistent losses, negative equity, severe working capital deficits). It indicates extreme financial distress well below the 1.81 threshold. Such companies face very high near-term insolvency risk.
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