The five ratios inside the Z-Score
Z = 1.2(WC/TA) + 1.4(RE/TA) + 3.3(EBIT/TA) + 0.6(MVE/TL) + 1.0(Sales/TA)
Safe, grey, and distress zones
| Z-Score | Zone | Interpretation |
|---|---|---|
| > 2.99 | Safe Zone | Low probability of bankruptcy |
| 1.81–2.99 | Grey Zone | Moderate risk — further analysis needed |
| < 1.81 | Distress Zone | High probability of bankruptcy within 2 years |
The Z-Score as a screening tool
The Z-Score was 72% accurate in predicting bankruptcy two years in advance in Altman’s original study. It’s most useful as a screening tool — flag companies in the distress zone for deeper analysis, don’t rely on it as a standalone verdict.
Calculate a real company's Z-Score
Calculate the Z-Score for a company using data from Fundamentals. You’ll need working capital, retained earnings, EBIT, market cap, total liabilities, sales, and total assets.
Reading a distress-zone Z-Score
A company’s Z-Score is 1.65. What does this tell you?
Why the EBIT/TA term carries the most weight
How to read a grey-zone score
Altman Z-Score is 2.8. Threshold: Z < 1.81 = distress, Z > 3.0 = safe. How confident are you the company is safe?
Check your understanding
Sit with the ideas.
A company has Z-Score of 1.5. Its stock trades at $30 with a P/E of 8x. Is this a value opportunity or a value trap?
Why: