Altman Z-Score


DEFINITION of 'Altman Z-Score'

The output of a credit-strength test that gauges a publicly traded manufacturing company's likelihood of bankruptcy. The Altman Z-score, is based on five financial ratios that can be calculated from data found on a company's annual 10K report. The Altman Z-score is calculated as follows:

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E


A = Working Capital/Total Assets
B = Retained Earnings/Total Assets
C = Earnings Before Interest & Tax/Total Assets
D = Market Value of Equity/Total Liabilities
E = Sales/Total Assets

A score below 1.8 means the company is probably headed for bankruptcy, while companies with scores above 3.0 are not likely to go bankrupt. The lower/higher the score, the lower/higher the likelihood of bankruptcy.


Loading the player...

BREAKING DOWN 'Altman Z-Score'

NYU Stern Finance Professor, Edward Altman, developed the Altman Z-score formula in 1967. In 2012, he released an updated version called the Altman Z-score Plus, that can be used to evaluate both public and private companies, both manufacturing and nonmanufacturing companies and both U.S. and non-U.S. companies. Investors can use Altman Z-scores to help determine whether they should buy or sell a particular stock if they're concerned about the underlying company's financial strength. The Altman Z-score Plus can be used to evaluate corporate credit risk.

  1. Multiple Discriminant Analysis ...

    A statistical technique used to reduce the differences between ...
  2. Beta Risk

    The probability that a false null hypothesis will be accepted ...
  3. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  4. Bankruptcy Risk

    The possibility that a company will be unable to meet its debt ...
  5. Chapter 7

    A bankruptcy proceeding in which a company stops all operations ...
  6. Zeta Model

    A mathematical formula developed in the 1960s by NYU Professor ...
Related Articles
  1. Stock Analysis

    Is Advanced Micro Devices Bankruptcy Imminent?

    Review the current financial condition of Advanced Micro Devices (AMD) and the consensus of opinion on whether the company is headed for bankruptcy.
  2. Fundamental Analysis

    What's a Z-Score?

    In statistics, Z-score refers to how many standard deviations a particular data point is from the mean of the data. A Z-score of 1 means the data point is one standard deviation from the mean. ...
  3. Markets

    How To Calculate A Z-Score

    Investors need to know how to detect signs of looming bankruptcy. The Z-score can help.
  4. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  5. Mutual Funds & ETFs

    Top 3 Muni California Mutual Funds

    Discover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
  6. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  7. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  8. Fundamental Analysis

    Emerging Markets: Analyzing Colombia's GDP

    With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy.
  9. Investing

    What is Descriptive Statistics?

    Descriptive statistics is the term applied to meaningful data analysis.
  10. Fundamental Analysis

    Create a Monte Carlo Simulation Using Excel

    How to apply the Monte Carlo Simulation principles to a game of dice using Microsoft Excel.
  1. What does a Z-Score tell a stock analyst about the health of a company?

    The Altman Z-score measures a company's likelihood of bankruptcy by using five ratios that are assigned different weights ... Read Full Answer >>
  2. How is the Altman Z-Score used in fundamental analysis?

    The Altman Z-score is used in fundamental analysis to gauge the financial health of a company. It is used to assess a company's ... Read Full Answer >>
  3. How can an investor use the Z-Score to compare investment options?

    The Altman Z-score is a test that an investor uses to gauge the likelihood of a company going bankrupt. The Altman Z-score ... Read Full Answer >>
  4. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  5. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  6. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!