Altman Z-Score
A weighted combination of five financial ratios that estimates a company's likelihood of financial distress.
Formula
Z = 1.2 x (Working Capital/Total Assets) + 1.4 x (Retained Earnings/Total Assets) + 3.3 x (EBIT/Total Assets) + 0.6 x (Market Value of Equity/Total Liabilities) + 1.0 x (Sales/Total Assets)
Unit
ratio (x, times)
In depth
The Z-score compresses liquidity, cumulative profitability, current earning power, market confidence and asset productivity into one number, with a score above 2.99 conventionally read as safe and below 1.81 as distressed. It was derived from manufacturing companies in the United States in the 1960s, so applying it unmodified to Indian financial firms or asset-light services businesses produces misleading results. The market-value term also means the score falls as the share price falls, which introduces circularity when the score is used to judge that same share. Treat it as a screening flag that prompts investigation, never as a verdict.
Worked example
Working capital 200, retained earnings 365, EBIT 160, sales 1,000, total assets 1,200, total liabilities 750, market value of equity 1,800. Z = 1.2(0.167) + 1.4(0.304) + 3.3(0.133) + 0.6(2.40) + 1.0(0.833) = 0.20 + 0.43 + 0.44 + 1.44 + 0.83 = 3.34, in the safe zone.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Altman Z-Score” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.