What this calculator does
Edward Altman built the Z-Score in 1968 by finding which financial ratios best separated companies that went bankrupt from those that did not. Five ratios, each with a fitted weight, combine into one number that sorts firms into three zones.
It has held up remarkably well for a model that old. Above 2.99 is the safe zone, below 1.81 signals distress, and the range between is a grey area where the model declines to commit.
The formula
Five ratios are calculated from the balance sheet and income statement, each multiplied by its fitted coefficient and added. The weights favour profitability and market value, which carry the largest coefficients.
| Term | Meaning |
|---|---|
| Safe zone | A score above 2.99, indicating low probability of distress. |
| Grey area | Between 1.81 and 2.99, where the model gives no clear signal. |
| Distress zone | Below 1.81, historically associated with a high bankruptcy rate. |
The inputs explained
| Field | What to enter |
|---|---|
| Net working capital ($) | Net working capital, being current assets less current liabilities. |
| Total assets ($) | Total assets. |
| Retained earnings ($) | Retained earnings, which may be negative for a company with accumulated losses. |
| EBIT (operating profit) ($) | Operating profit before interest and tax. |
| Market value of equity ($) | Market value of equity, being share price times shares outstanding. |
| Total liabilities ($) | Total liabilities. |
| Sales (revenue) ($) | Annual revenue. |
When to use it
Screening a portfolio for credit risk
A low score flags companies worth examining before the market prices the risk.
Assessing a customer or supplier
Extending credit to a company in the distress zone deserves more scrutiny.
Tracking a turnaround
A score moving up through the zones over several years is evidence the recovery is real.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How do retained earnings move the score?
A struggling company at three levels of accumulated retained earnings.
| Retained earnings | Altman Z-Score | Zone |
|---|---|---|
| −$200k (accumulated losses) | 1.60 | Distress: high probability of financial distress |
| $0k | 1.74 | Distress: high probability of financial distress |
| $600k | 2.16 | Grey area: needs closer inspection |
Questions
How reliable is the Z-Score?
The original study classified bankrupt firms correctly at a high rate, and it has remained a standard screening tool. It is a warning signal rather than a prediction, and it works best on manufacturing companies, which is what it was fitted on.
Does it work for all companies?
Not well. The original model was built for public manufacturers. Altman later published separate variants for private companies and for non-manufacturers, which use different weights and drop the sales ratio.
Why does retained earnings carry weight?
Because it captures cumulative profitability and age. A company with substantial retained earnings has survived and earned for years, while accumulated losses indicate a business that has consumed capital rather than generated it.
Should a low score be acted on directly?
No. It is a screen that identifies companies worth examining, not a conclusion about any particular one. The model knows nothing about a company's circumstances, industry or prospects.
For debt levels and interest cover, see the leverage ratios calculator. For short-term liquidity, see the liquidity ratios calculator.