The Altman Z-Score explained
The Altman Z-Score is a measure of financial distress risk — roughly, how far a company's balance sheet and earnings sit from the pattern seen in companies that went bankrupt.
Edward Altman, a finance professor at New York University, developed it in 1968 by comparing the accounts of manufacturers that failed with similar ones that survived. Five ratios, combined with particular weights, separated the two groups surprisingly well. The formula is still in use, and its limits are as well documented as its strengths.
ShareSift uses the original 1968 version, designed for publicly listed companies.
The formula
The Z-Score combines five ratios, each measured against total assets:
| Ratio | What it measures | Weight |
|---|---|---|
| A Working capital ÷ total assets | Short-term liquidity | 1.2 |
| B Retained earnings ÷ total assets | Profitability accumulated over the company's life | 1.4 |
| C Operating income ÷ total assets | How productively assets generate profit | 3.3 |
| D Market value of equity ÷ total liabilities | How far the value could fall before liabilities exceed it | 0.6 |
| E Revenue ÷ total assets | How efficiently assets generate sales | 1.0 |
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
Two notes on how ShareSift calculates it:
- Operating income stands in for the earnings before interest and tax (EBIT) Altman originally used.
- Market value of equity is the company's current market capitalisation, so the D ratio moves with the share price. A sharp fall in price can lower the Z-Score even if nothing in the accounts has changed.
The accounting figures come from the latest annual report: SEC filings for US companies, Yahoo Finance's annual statements elsewhere.
The three zones
| Z-Score | Zone | Reading |
|---|---|---|
| Above 2.99 | Safe | Profile typical of companies that did not fail |
| 1.81 to 2.99 | Grey | Neither clearly safe nor clearly at risk |
| Below 1.81 | Distress | Profile resembling companies that went on to fail |
These boundaries are from Altman's original paper. A distress reading is not a prediction that a company will fail — it is a signal to look closely at the balance sheet.
When the score is missing
If any of the five inputs is not reported, ShareSift shows no Z-Score rather than an estimate. A number built on four of five ratios is not an Altman Z-Score — it only looks like one — and showing it would invite comparison with thresholds it was never calibrated against.
The most common reason is that the company is a bank or other financial institution. Banks do not separate current assets and liabilities the way an industrial company does, so working capital — ratio A — cannot be calculated.
Worked examples
Live figures from ShareSift at the time of writing.
Apple (AAPL): 11.42 — safe
Far above the 2.99 threshold. The biggest contributor is the D ratio: Apple's market value is many times its total liabilities, so the share price would have to fall a very long way before equity was exhausted. Strong operating income relative to assets adds to it.
A score this high is typical of very large, highly valued, profitable companies. It says distress is remote. It says nothing about whether the shares are good value — Apple scores only 30 out of 100 on the value score.
BHP (BHP.AX): 3.84 — safe
Comfortably safe, though much closer to the boundary than Apple. A miner carries a large base of mines, plant and equipment, which keeps ratios measured against total assets lower than a technology company's. That is a feature of the industry, not a weakness of BHP.
Commonwealth Bank (CBA.AX): no score
CBA shows no Z-Score, because working capital cannot be calculated for a bank. That is the correct outcome: the Z-Score was never designed for banks, and any number shown would mislead.
The important limits
- It was built on 1960s US manufacturers. It works best for industrial companies. It is not meaningful for banks and insurers, and less reliable for service and technology businesses whose value sits in intangible assets the balance sheet does not record.
- Capital-heavy businesses score low by construction. Airlines, utilities, carmakers with large in-house finance arms and property companies often land in the grey or distress zone while being entirely sound, because their business model carries large liabilities. ShareSift adds a caveat to distress readings for exactly this reason.
- It moves with the share price, through ratio D. A market sell-off can push healthy companies down a zone.
- It reads one year's accounts. It cannot see a deteriorating trend the way the Piotroski F-Score can.
How to use it
Treat the Z-Score as a screen for balance-sheet risk, not a rating. A safe reading on an industrial company is reassuring. A distress reading is a prompt to read the balance sheet and understand why — and very often the answer is simply the industry. Read it alongside the F-Score, which shows whether things are improving, and the value score, which shows whether the shares are cheap.
This information is general in nature and does not take into account your objectives, financial situation or needs. ShareSift is not a financial adviser and does not hold an Australian Financial Services Licence. Consider whether any information is appropriate for you and seek independent advice before making an investment decision.