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Altman Z-score
Also called: Z-score, Altman Z, Z-double-prime score
A formula that combines balance-sheet and income ratios to estimate how close a company is to financial distress.
Explanation
Edward Altman built the original Z-score in 1968 from manufacturers that had gone bankrupt and ones that had not: Z = 1.2 × working capital/total assets + 1.4 × retained earnings/total assets + 3.3 × EBIT/total assets + 0.6 × market value of equity/total liabilities + 1.0 × sales/total assets. Above 2.99 is the safe zone, 1.81 to 2.99 the grey zone and below 1.81 the distress zone.
For non-manufacturers, Altman’s Z″-score drops the sales ratio, which varies too much between industries, and uses book equity: Z″ = 6.56 × working capital/total assets + 3.26 × retained earnings/total assets + 6.72 × EBIT/total assets + 1.05 × book equity/total liabilities. Its zones are above 2.6 safe, 1.1 to 2.6 grey and below 1.1 distress.
The model does not fit financial companies, whose balance sheets are mostly loans or investments, and large accumulated losses push it into the distress zone, which most young biotech companies are in by design.
Why it matters
The Z-score condenses liquidity, accumulated profitability, earning power and leverage into one number. A distress-zone reading next to a short runway is a strong warning sign.
How Equity Dictionary measures it
The Outlook tab’s quality scores use the original model for manufacturers and Z″ for other companies. Banks, insurers, REITs, BDCs and funds get no Z-score, and the reason is shown.
Related terms
- Piotroski F-score: A 0–9 score of financial health built from nine pass/fail tests of profitability, balance-sheet strength and efficiency, comparing the last two fiscal years.
- Going concern: An accounting warning that a company may not be able to keep operating and paying its bills over the next year without raising money or restructuring.
- Cash runway: How many months a company can keep operating on the cash it has, at its current burn rate, before it must raise more.
- SIC code: The four-digit Standard Industrial Classification code the SEC assigns to each registrant to describe its main line of business.
- Dilution-risk score: Equity Dictionary’s 0–100 estimate of how much pressure a company is under to issue new stock, built from eight weighted factors.
Plain-English summary for research; not legal or investment advice.