{"id":14413,"date":"2026-05-27T07:42:30","date_gmt":"2026-05-27T07:42:30","guid":{"rendered":"https:\/\/lemonn.co.in\/blog\/glossary\/altman-z-score\/"},"modified":"2026-05-27T07:42:30","modified_gmt":"2026-05-27T07:42:30","slug":"altman-z-score","status":"publish","type":"glossary","link":"https:\/\/lemonn.co.in\/blog\/glossary\/altman-z-score\/","title":{"rendered":"Altman Z-Score"},"content":{"rendered":"

The Altman Z-Score<\/a> is a financial formula developed by NYU professor Edward Altman in 1968 to predict the probability of a company going bankrupt within two years. It uses five financial ratios weighted and combined into a single score that classifies companies into safe, grey, and distress zones.<\/p>\n

What Is the Altman Z-Score?<\/h2>\n

Z-Score = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 1.0(X5)<\/p>\n

Where:
\n– **X1** = Working Capital \/ Total Assets<\/a> (liquidity<\/a>)
\n– **X2** = Retained Earnings \/ Total Assets (accumulated profitability)
\n– **X3** = EBIT<\/a> \/ Total Assets (operating efficiency)
\n– **X4** = Market Value<\/a> of Equity<\/a> \/ Total Liabilities<\/a> (leverage<\/a>)
\n– **X5** = Revenue<\/a> \/ Total Assets (asset turnover)<\/p>\n

This formula is for publicly listed manufacturing companies. Modified versi<\/a>ons exist for private companies and non-manufacturing businesses.<\/p>\n

Interpreting the Z-Score<\/h2>\n

| Z-Score | Interpretation |
\n|———|—————|
\n| Above 2.99 | Safe zone; low bankruptcy risk |
\n| 1.81 to 2.99 | Grey zone; moderate risk; monitor closely |
\n| Below 1.81 | Distress zone; high bankruptcy risk within 2 years |<\/p>\n

Accuracy and Limitations<\/h2>\n

The original Altman Z-Score predicted bankruptcy with 72-80% accuracy for manufacturing companies in the original study period. However:
\n– It was developed on US data from the 1960s; applicability to Indian markets may vary
\n– Not applicable to banks and financial companies (different capital structures)
\n– Market cap-dependent component makes it volatile for small-cap companies
\n– Does not account for qualitative factors (management quality, industry disruption)<\/p>\n

Practical Example<\/h2>\n

An analyst calculates a manufacturing company’s Z-Score at 1.6 (in the distress zone). The company has been carrying high debt, declining working capital, and falling EBIT. The Z-Score quantifies the financial stress already visible in the underlying ratios, alerting the analyst to review the company for distress risk.<\/p>\n

Key Takeaways<\/h2>\n

– Altman Z-Score predicts bankruptcy risk using five financial ratios; below 1.81 signals high risk
\n– Above 2.99 is safe; 1.81-2.99 is grey zone; requires monitoring
\n– Most effective for publicly listed manufacturing companies; modified versions exist for other types
\n– A useful quantitative screening tool but should not replace fundamental analysis
\n– Declining Z-Scores over time are a more meaningful signal than a single data point<\/p>\n","protected":false},"excerpt":{"rendered":"

The Altman Z-Score is a financial formula developed by NYU professor Edward Altman in 1968 to predict the probability of a company going bankrupt within two years. It uses five financial ratios weighted and combined into a single score that classifies companies into safe, grey, and distress zones. What Is the Altman Z-Score? Z-Score = […]<\/p>\n","protected":false},"author":3,"featured_media":0,"menu_order":0,"template":"","meta":{"_uag_custom_page_level_css":"","footnotes":""},"class_list":["post-14413","glossary","type-glossary","status-publish","hentry"],"blocksy_meta":[],"uagb_featured_image_src":{"full":false,"thumbnail":false,"medium":false,"medium_large":false,"large":false,"1536x1536":false,"2048x2048":false,"web-stories-poster-portrait":false,"web-stories-publisher-logo":false,"web-stories-thumbnail":false},"uagb_author_info":{"display_name":"Team Lemonn","author_link":"https:\/\/lemonn.co.in\/blog\/author\/ashu\/"},"uagb_comment_info":0,"uagb_excerpt":"The Altman Z-Score is a financial formula developed by NYU professor Edward Altman in 1968 to predict the probability of a company going bankrupt within two years. It uses five financial ratios weighted and combined into a single score that classifies companies into safe, grey, and distress zones. What Is the Altman Z-Score? Z-Score =…","_links":{"self":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/14413","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary"}],"about":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/types\/glossary"}],"author":[{"embeddable":true,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":0,"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/glossary\/14413\/revisions"}],"wp:attachment":[{"href":"https:\/\/lemonn.co.in\/blog\/wp-json\/wp\/v2\/media?parent=14413"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}