Financial
Altman Z-Score formula: corporate credit risk & bankruptcy distress zones
Practice the common rounded-coefficient Altman Z-score for public manufacturing firms and its conventional zones. The result is a screening metric, not a default probability.
Combine liquidity, profitability, leverage, and asset turnover into one credit score
This is the public-manufacturing version of the Altman Z-score with conventional rounded weights. It is not calibrated for every industry, private company or financial institution, and does not guarantee a prediction two years ahead. Other Z-score variants use different coefficients and inputs.
X1 = Working Capital / Total Assets (weight 1.2), X2 = Retained Earnings / Total Assets (weight 1.4), X3 = EBIT / Total Assets (weight 3.3—the heaviest weight!), X4 = Market Value of Equity / Total Liabilities (weight 0.6), and X5 = Sales / Total Assets (weight 1.0). Scores > 2.99 sit in the Safe Zone, 1.81–2.99 in the Grey Caution Zone, and < 1.81 in the Distress Zone.
Use financial amounts in the same units and reporting period, and document the date of market equity value. Safe Zone is a conventional model label, not proof of solvency. Negative working capital, retained earnings or EBIT are valid model inputs; assets and liabilities must be positive for these ratios.
| Altman Ratio Component ($1,000M Assets) | Ratio Value | Weight | Weighted Contribution |
|---|---|---|---|
| X1: Working Capital / Assets ($200 / $1,000) | 0.20 | 1.2 | 0.240 |
| X2: Retained Earnings / Assets ($300 / $1,000) | 0.30 | 1.4 | 0.420 |
| X3: EBIT / Assets ($150 / $1,000) | 0.15 | 3.3 | 0.495 |
| X4: Mkt Equity / Liab ($900/$500) & X5: Sales/Assets (1.20) | 1.80 & 1.20 | 0.6 & 1.0 | 1.080 + 1.200 -> Z = 3.435 (model Safe Zone) |
Calculate the 5-factor Altman Z-Score
A2=TotalAssets, B2=WorkingCap, C2=RetainedEarnings, D2=EBIT, E2=MktCapEquity, F2=TotalLiabilities, G2=Sales.
=IF(OR(COUNT(A2:G2)<>7,A2<=0,F2<=0,E2<0,G2<0),"Invalid inputs",ROUND(1.2 * (B2 / A2) + 1.4 * (C2 / A2) + 3.3 * (D2 / A2) + 0.6 * (E2 / F2) + 1 * (G2 / A2), 3))Classify Z-Score into Safe, Grey, or Distress credit zone
This example uses >2.99 for Safe Zone, >=1.81 through 2.99 for Grey Zone, and <1.81 for Distress Zone. Classification uses the unrounded score. These labels do not replace a credit assessment.
=IF(OR(COUNT(A2:G2)<>7,A2<=0,F2<=0,E2<0,G2<0),"Invalid inputs",LET(z, 1.2 * (B2 / A2) + 1.4 * (C2 / A2) + 3.3 * (D2 / A2) + 0.6 * (E2 / F2) + 1 * (G2 / A2), IFS(z > 2.99, "Safe Zone", z >= 1.81, "Grey Zone", TRUE, "Distress Zone")))Try the example
Use the original values or change them to test your understanding.