Altman Z-Score Explained

The Altman Z-score is a number that estimates how likely a company is to run into financial distress or bankruptcy. It was developed by finance professor Edward Altman in 1968 and is still one of the most widely used distress measures.

The version we use

Stocktoria uses the Z″ (Z-double-prime) variant, which works from the balance sheet alone — no stock price needed, so it can’t be distorted by market swings:

Z″ = 6.56·X1 + 3.26·X2 + 6.72·X3 + 1.05·X4

where:

• X1 = working capital ÷ total assets (short-term cushion)
• X2 = retained earnings ÷ total assets (accumulated profitability)
• X3 = EBIT ÷ total assets (operating profitability)
• X4 = book equity ÷ total liabilities (how much owners’ money backs the debt)

How to read it

• Above 2.6 — safe zone: low distress risk
• 1.1 to 2.6 — grey zone: watch it
• Below 1.1 — distress zone: elevated bankruptcy risk

It does not apply to banks and insurers (their balance sheets work differently), so we leave it blank for them. A low Z-score is a caution flag, not a prediction — companies recover, and heavy share buybacks can push book equity down and the score with it.

Browse the distress watch list or pair it with the Piotroski F-score for a fuller health picture.