The Altman Z-Score is a single number that estimates a company's risk of going bankrupt within about the next two years. Edward Altman, a finance professor, built it in 1968 by studying companies that had gone bust and finding the five financial ratios that best told them apart from the survivors. The score blends those five together, weighted by how strongly each one predicts trouble:
Z = 1.2·(Working capital ÷ Assets) + 1.4·(Retained earnings ÷ Assets) + 3.3·(EBIT ÷ Assets) + 0.6·(Market cap ÷ Total liabilities) + 1.0·(Sales ÷ Assets)
You do not need to memorize the formula. The idea behind it is simple: each piece checks a different kind of health, short-term liquidity, accumulated profits over the company's life, current earning power, how the market values it against what it owes, and how hard its assets work. A company weak on several fronts at once scores low.
Altman built and tuned the model on public manufacturing companies, so it is much less reliable for banks, tech, and other businesses that own few physical assets. Outside the industrial world, treat its result as a rough hint rather than a firm verdict.
How to read it: • Above 3.0: the safe zone • 1.8 to 3.0: a grey zone, worth watching • Below 1.8: real risk of financial distress