The Altman Z-Score is a formula developed by NYU professor Edward Altman in 1968 that predicts the probability of a company entering bankruptcy within two years. It combines five financial ratios — each measuring a different dimension of financial health — into a single weighted score. Despite being over 50 years old, the Z-Score remains one of the most widely used and empirically validated measures of corporate financial distress.
The five components measure liquidity (working capital to total assets), cumulative profitability (retained earnings to total assets), operating efficiency (EBIT to total assets), market confidence (market value of equity to total liabilities), and asset productivity (revenue to total assets). Each component is weighted and summed to produce the final score.
A Z-Score above 2.99 places the company in the "safe zone" — historically, companies with scores above this threshold have a very low probability of bankruptcy. A score between 1.81 and 2.99 is the "gray zone," where the outcome is uncertain. A score below 1.81 is the "distress zone," where the probability of financial distress is elevated.
The original model was designed for publicly traded manufacturing companies. It is less reliable for financial institutions, utilities, and early-stage companies with minimal retained earnings. Despite these limitations, it remains a useful first-pass screening tool for identifying companies under financial stress.
Altman Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where: A = Working Capital / Total Assets B = Retained Earnings / Total Assets C = EBIT (TTM) / Total Assets D = Market Value of Equity / Total Liabilities E = Revenue (TTM) / Total Assets
GeminIQ computes all five components using XBRL-tagged SEC filing data. Working Capital, Retained Earnings, Total Assets, Total Liabilities, EBIT, and Revenue are all sourced directly from the company's filings. Market Value of Equity is calculated as the closing stock price on the filing period end date multiplied by basic shares outstanding. When market cap data is not available, GeminIQ uses book equity (Total Shareholders' Equity) as a fallback for component D, which produces a more conservative estimate.
A: Above 2.99 is the "safe zone" — the company has strong financial health and a low probability of bankruptcy. Between 1.81 and 2.99 is the "gray zone" — financial health is uncertain and warrants further investigation. Below 1.81 is the "distress zone" — the company has elevated bankruptcy risk. These thresholds were established from Altman's original research on manufacturing companies.
A: The original model was designed for publicly traded manufacturing companies and is most reliable for that group. Financial institutions (banks, insurance companies), utilities, and early-stage companies with minimal retained earnings may produce misleading scores. Altman later developed modified versions (Z'-Score for private companies and Z''-Score for non-manufacturing companies), but GeminIQ uses the original model as it is the most widely recognized.
A: The Z-Score is a composite of five ratios, so any difference in the underlying inputs — Working Capital, Retained Earnings, Total Assets, Total Liabilities, EBIT, Revenue, or Market Value of Equity — will cause the final score to diverge. The most common sources of difference are how EBIT is derived (some platforms use operating income, which may differ from EBIT if non-operating items are classified differently) and how market capitalization is calculated (share count × price, where the choice of share count date and price date can vary).