What is the Altman Z-Score?
A multivariable predictor of corporate bankruptcy developed by Edward Altman in 1968. Combines five financial ratios into a single score; below 1.8 signals distress, above 3.0 signals safety.
The Z-Score formula: Z = 1.2*A + 1.4*B + 3.3*C + 0.6*D + 1.0*E, where A = working capital/total assets, B = retained earnings/total assets, C = EBIT/total assets, D = market cap/total liabilities, E = sales/total assets. The original 1968 study found that companies with Z < 1.8 had a high probability of bankruptcy within 2 years; Z > 3.0 indicated safety; the 1.8-3.0 range was a grey zone. Despite its age, the Z-Score remains a useful single-number summary of corporate financial health, especially for industrials and manufacturers.
Variants and limitations
Altman published variants for private companies (Z-Score) and non-manufacturers (Z-double-prime score) that drop the market-cap term. The original formula works best for publicly-traded manufacturers; it under-performs on banks, insurance companies, and pure software businesses where the asset structure differs.
Modern alternatives (Ohlson O-Score, Zmijewski) use logit regressions and are more statistically rigorous, but the simplicity of the Z-Score keeps it in wide practical use. invest-like surfaces the Z-Score as context on each per-stock verdict page; it does not drive the framework grades directly.
Frequently asked questions
What is the Altman Z-Score?
A bankruptcy-prediction score combining five financial ratios into a single number. Below 1.8 signals distress, above 3.0 signals safety.
Does it work in 2026?
Reasonably well for manufacturers and industrials. Less reliable for banks, insurance, and software where the original calibration doesn't fit the asset structure.
Does invest-like use the Z-Score?
It's surfaced as context on verdict pages but doesn't drive the framework grades. The financial-health pillars use net-debt/EBITDA, current ratio, and Piotroski F-Score directly.
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