How to use the altman z-score calculator
- Choose the company type: public manufacturer, private manufacturer or non-manufacturer.
- Enter total assets, working capital, retained earnings, EBIT, equity and total liabilities for one period. Sales are needed for the first two types.
- Use the market value of equity for the public manufacturer model and the book value for the other two.
- Read the Z-score, the zone and the table that shows each ratio, its coefficient and its contribution.
Formula
Original: Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5 (zones: above 2.99, below 1.81)
Z-prime: Z' = 0.717 X1 + 0.847 X2 + 3.107 X3 + 0.420 X4 + 0.998 X5 (above 2.9, below 1.23)
Z-double-prime: Z'' = 6.56 X1 + 3.26 X2 + 6.72 X3 + 1.05 X4 (above 2.6, below 1.1)
X1 = working capital / total assets, X2 = retained earnings / total assets, X3 = EBIT / total assets, X4 = equity / total liabilities, X5 = sales / total assets
The ratios are used as decimals, so 0.20 rather than 20. The weights were fitted to past company data by Edward Altman, and each variant has its own cutoffs for the upper, gray and lower zones.
A company with 1,000 of assets
Take total assets of 1,000, working capital 200, retained earnings 300, EBIT 150, market value of equity 600, sales 1,200 and total liabilities 400. The ratios are 0.20, 0.30, 0.15, 1.50 and 1.20. The weighted parts are 0.240, 0.420, 0.495, 0.900 and 1.200, which add up to a Z-score of 3.255, shown as 3.26. That is above 2.99, so it falls in the upper zone.
The same figures in the private manufacturer model give 2.69, which is between 1.23 and 2.9 and so in the gray zone. A weak year with negative working capital, a small retained earnings balance and a loss gives a Z-score of 0.67 in the original model, below 1.81.
What the zones mean
The upper zone means the figures resemble companies that were financially sound in the data the model was fitted to, and the lower zone means they resemble companies that went on to fail. The gray zone in between is where the model cannot separate the two groups well, and many healthy companies sit there.
It is an output of arithmetic on the numbers you entered. It does not predict what will happen to a company, and it was designed for particular kinds of companies and eras.
Choosing the right variant
The original model is for publicly traded manufacturers and needs a market value of equity. Z-prime replaces that with book value so that it can be used for private manufacturers. Z-double-prime drops sales to reduce the effect of industry and is meant for non-manufacturers.
Check leverage with the Debt to Equity Ratio Calculator and the working capital input with the Working Capital Calculator. The cash picture comes from the Indirect Cash Flow Statement Builder.
Assumptions and limits
- The coefficients and cutoffs shown are the published ones for each variant, and they are not adjusted for any country, size or period.
- All figures should be for the same period and currency. EBIT, sales and retained earnings come from the income statement and balance sheet.
- Total assets and total liabilities must be above zero.
- This is informational output of a model, not a rating, a prediction or advice.
- Nothing typed here leaves your browser.
Frequently asked questions
Why is X4 different between the variants?
The original model uses the market value of equity, which exists only for listed companies. The other two use book value so that they can be applied to firms without a share price.
Can Z be negative?
Yes. Negative working capital, negative retained earnings or a loss before interest and taxes pull the ratios below zero, and a very weak company can have a Z-score below zero.
Is a gray zone result good or bad?
It is neither. The model could not place the firm with confidence in either group. Look at the individual ratios in the table to see which ones pull the score down.
Does it work for banks or start-ups?
Not well. The model was fitted to industrial companies, and balance sheets of banks and early-stage firms look very different, so treat any score for them with great caution.