Altman Z-Score

Overview

Altman Z-Score is a linear discriminant model predicting bankruptcy probability from five financial ratios. Z = 1.2X₁ + 1.4X₂ + 3.3X₃ + 0.6X₄ + 1.0X₅. Zones: Z > 2.99 (safe), 1.81-2.99 (grey), Z < 1.81 (distress). Originally for public manufacturing firms; variants exist for private and non-manufacturing.

When to Use

Trigger conditions:

• Screening companies for bankruptcy risk
• Quick credit assessment using publicly available financials
• Monitoring portfolio companies for financial distress signals

When NOT to use:

• For financial institutions (banks, insurers) — different capital structures
• When detailed credit scoring is needed (use logistic regression credit models)

Algorithm