Financial metric · Composite scores
Altman Z-Score
A score built from several financial ratios that estimates how likely a company is to fall into financial distress. The lower the score, the more fragile the company.
How to calculate it
Original Z (1968, public manufacturers) = 1.2×X1 + 1.4×X2 + 3.3×X3 + 0.6×X4 + 1.0×X5; above 2.99 safe, 1.81–2.99 grey, below 1.81 distressZ″ (revised, non-manufacturers) = 6.56×X1 + 3.26×X2 + 6.72×X3 + 1.05×X4; above 2.6 safe, 1.1–2.6 grey, below 1.1 distressX1 = working capital ÷ total assets; X2 = retained earnings ÷ total assets; X3 = EBIT ÷ total assets; X4 = market value of equity ÷ total liabilities (original) or book equity ÷ total liabilities (Z″); X5 = sales ÷ total assetsHow to read it
- Each term measures something different: short-term liquidity, accumulated past profits, current earning power and the equity cushion protecting creditors. Look at which term drags the score down.
- A decline over several years matters more than a single year's value.
Common pitfalls
- The cutoffs come from decades-old samples of U.S. companies. Most companies in the distress zone do not go bankrupt.
- Companies with negative working capital score poorly on X1 even when it reflects strength, such as retailers funded by suppliers.
- Buybacks shrink retained earnings and book equity, which lowers the score for healthy companies that return a lot of cash.
- The original Z and Z″ use different inputs and cutoffs; never mix them. Neither applies to banks and insurers.
Where to find it in a 10-K
Balance sheet (current assets and liabilities, retained earnings or accumulated deficit, equity, total liabilities) and income statement (operating income, revenue) from the latest 10-K.
U.S. vs. China reporting
Like the F-Score, the Z-Score was built on U.S. companies. A-share applications usually use Z″ because book values are more stable than Chinese market prices, and Chinese companies' supplier-funded working capital often distorts X1.