Altman Z-Score
A formula that predicts bankruptcy risk using five financial ratios. Above 2.99 = safe zone, 1.81-2.99 = grey zone, below 1.81 = distress zone.
Formula
1.2x(WC/TA) + 1.4x(RE/TA) + 3.3x(EBIT/TA) + 0.6x(MCap/TL) + 1.0x(Rev/TA)
Why it matters
Bankruptcy doesn't happen overnight, but it often catches equity investors off guard. The Z-Score provides an early warning system by distilling balance sheet health into one number. It's most useful for manufacturing and industrial companies.
How to read it
Above 2.99 = safe zone (low bankruptcy probability). 1.81\u20132.99 = grey zone (proceed with caution, dig deeper). Below 1.81 = distress zone (statistically elevated bankruptcy risk within 2 years). Be careful applying it to financials, tech, or service companies \u2014 the original model was calibrated on manufacturers.
Lessons that use this term
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