The Altman Z-score combines ratios from the balance sheet and the income statement into one value that describes the risk of financial distress: the higher the value, the lower the distress according to this model. Besides the original Z-score, there is the Z″-score (Z double prime) for further nonfinancial industries.
AltmanZScore > 2.99
How do the Z-score and the Z″-score differ?
The original Z model is meant for listed manufacturing companies. The Z″-score uses book equity instead of market capitalization and leaves out the revenue term. Both weight these ratios from the latest annual report:
| Ratio | Calculation |
|---|---|
| X1 | Working capital (current assets minus current liabilities) divided by total assets |
| X2 | Retained earnings divided by total assets |
| X3 | EBIT divided by total assets |
| X4 | Market capitalization (Z-score) or book equity (Z″-score) divided by total liabilities |
| X5 | Revenue divided by total assets, only in the Z-score |
Z = 1.2 × X1 + 1.4 × X2 + 3.3 × X3 + 0.6 × X4 + 0.999 × X5
Z″ = 6.56 × X1 + 3.26 × X2 + 6.72 × X3 + 1.05 × X4For the Z-score, Altman called values above 2.99 the safe zone and below 1.81 the distress zone; for the Z″-score, above 2.6 and below 1.1. In between lies a grey zone. Critivest uses the Z″-score without the constant of 3.25 Altman later added for emerging markets.
Altman Z-score and Z″-score: a worked example
The fictional Example Company, amounts in EUR million:
| X1 | (3,000 − 2,000) / 10,000 = 0.10 |
|---|---|
| X2 | 2,500 / 10,000 = 0.25 |
| X3 | 900 / 10,000 = 0.09 |
| X4 in the Z-score | 12,000 / 6,000 = 2.00 |
| X4 in the Z″-score | 4,000 / 6,000 ≈ 0.67 |
| X5 | 11,000 / 10,000 = 1.10 |
| Z-score | 0.12 + 0.35 + 0.297 + 1.2 + 1.099 ≈ 3.07 |
| Z″-score | 0.656 + 0.815 + 0.605 + 0.7 ≈ 2.78 |
Example Company has total assets of 10,000, total liabilities of 6,000 and equity of 4,000; its market capitalization is 12,000.
What are the limits of the Altman scores?
- Altman developed the Z-score with data of US manufacturing companies from the 1940s to the 1960s. For other industries and countries, there are the Z″-score and further variants.
- Neither model is meant for banks, insurers and other financial companies; Critivest does not calculate them for these, nor when the sector is unknown.
- The annual reports can be up to a year old.
- The Z-score fluctuates with the share price, as it includes the market capitalization; the Z″-score does not.
- The scores describe statistical relationships and do not predict insolvency with certainty.
Using the Altman Z-score as your own criterion
This condition is met if the Z-score is above the upper limit Altman named:
AltmanZScore > 2.99For the Z″-score, the name is AltmanZDoublePrimeScore. You set the limits yourself.
Which annual data does Critivest use?
All balance sheet values come from the balance sheet at the end of the latest fiscal year, EBIT and revenue from the income statement of the same fiscal year, never from a mix with quarterly figures. The fiscal year must not end four or more quarters before the latest balance sheet. Only the Z-score uses the current market capitalization; for it, total liabilities are converted to the same currency.
Negative values, such as of working capital or retained earnings, count, as they are important warning signs; only total assets and total liabilities must be positive. If a value is missing, the score is not available.
Periods and missing values: Methodology.
Formula reference in Critivest
Name in conditions: AltmanZScore
Financial distress score for listed manufacturers, using annual accounts and the latest market capitalization. Higher scores indicate less distress. Requires complete data and a known nonfinancial sector.
Name in conditions: AltmanZDoublePrimeScore
Financial distress score for nonfinancial companies, using annual accounts and book equity without the emerging-market adjustment. Higher scores indicate less distress. Requires complete data and a known sector.
Related formulas
- Piotroski F-score: The Piotroski F-score awards 0 to 9 points for profitability, financing and efficiency from two annual reports. How Critivest calculates the nine points.
- Debt-to-equity ratio: The debt-to-equity ratio relates a company's liabilities to its equity. How Critivest calculates it from the latest balance sheet.
Sources
- Edward I. Altman (1968): Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. The Journal of Finance 23 (4), pp. 589–609
- Altman Z-score, Wikipedia
Last updated: November 4, 2026