How to Calculate Altman Z Score
What is Altman Z Score?
Altman Z-score predicts business bankruptcy risk using financial ratios: Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5.
Step-by-Step Guide
- 1Input five financial variables from balance sheet/income
- 2Calculate weighted Z-score
- 3Interpret: <1.8 bankruptcy risk, 1.8-3.0 gray zone, >3.0 safe
Worked Examples
Input
Strong profitable company
Result
Z ≈ 4.0 (safe)
Low bankruptcy risk
Common Mistakes to Avoid
- ✕Using outdated financial data
- ✕Applying to non-manufacturing (modified formula needed)
Frequently Asked Questions
Is Z-score accurate?
70-80% accurate first 2 years before bankruptcy; less reliable beyond.
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