Close this search box.

Table of Contents



The Z-Score is a financial metric developed by Edward Altman in the 1960s to predict the probability of a company’s bankruptcy. It is calculated by using various financial ratios and data points, including liquidity, leverage, profitability, and efficiency. A lower Z-Score indicates a higher risk of bankruptcy, while a higher Z-Score suggests a more stable financial position for the company.


The phonetic pronunciation of the keyword “Z-Score” is: /ˈzi skɔr/Z – /ˈzi/Score – /skɔr/

Key Takeaways

  1. Z-Score is a statistical measurement that describes a value’s relationship to the mean of a group of values. It is expressed in terms of standard deviations from the mean.
  2. It helps to standardize and compare individual data points to the overall distribution of the data set, making it easier to identify outliers or unusual values in the data.
  3. Z-Scores are often used in various statistical tests, such as hypothesis testing and tests of normality, as well as in applications like the grading of exams or assessments in educational contexts.


The Z-Score is a crucial metric in business and finance because it acts as a quantitative measure to evaluate the likelihood of a company’s bankruptcy. Developed by Dr. Edward Altman, this formula takes into account multiple financial ratios, such as liquidity, solvency, profitability, and financial leverage, to assess a firm’s overall financial health. By comparing a company’s Z-Score against established benchmarks, it helps investors, analysts, and management teams in identifying potential financial distress, making informed decisions, and developing strategic plans to address or prevent bankruptcy. As a result, the Z-Score serves as a valuable tool that combines various financial aspects to estimate the vulnerability of a business to financial risks and impending bankruptcy.


The Z-score, developed by Dr. Edward Altman in the 1960s, serves as a useful tool for evaluating a company’s financial health and predicting the likelihood of bankruptcy. Investors, creditors, and financial analysts utilize this measure to assess a firm’s financial stability and to make informed decisions regarding the allocation of resources. By applying the Z-score formula, which combines various financial ratios and metrics, stakeholders can gain a comprehensive understanding of a company’s overall financial strength and creditworthiness. This financial indicator assists them in analyzing business performance and identifying potential issues that may surface in the future.In practice, the calculation of a Z-score involves measuring five key financial variables: working capital, retained earnings, earnings before interest and taxes (EBIT), market value of equity, and total liabilities. These variables collectively provide a comprehensive view of a company’s liquidity, leverage, and profitability. The weighted coefficients of these variables produce the Z-score, which is subsequently compared to established thresholds to determine a company’s risk classification. A high Z-score is indicative of a lower probability of bankruptcy, while a low score signals a higher risk. As a result, the Z-score not only functions as a predictive tool for bankruptcy but also aids in comparing different companies and industries on a standard scale, thereby enabling stakeholders to make data-driven decisions and manage their investment portfolios effectively.


The Z-Score, developed by Edward Altman, is a financial measurement that helps predict the likelihood of a company going bankrupt within a two-year period. It combines five financial ratios to create a score that reflects a company’s credit risk. Here are three real-world examples that demonstrate the use of Z-Score in the business and finance landscape:1. Predicting Bankruptcy of Eastman Kodak Company:Eastman Kodak Company, a prominent player in the photography and imaging industry, filed for bankruptcy in January 2012. In the years leading up to the bankruptcy, the Z-Score could have been used to evaluate their financial health. For example, in 2010, Kodak’s Z-score was calculated to be 1.42, which indicated that the company was at a high risk of bankruptcy. As the Z-score continued to remain below the safety threshold of 2.99, it provided a strong signal that they were struggling financially and eventually led to their bankruptcy filing.2. Assessing Financial Stability of General Motors:General Motors (GM), the major vehicle manufacturer, filed for bankruptcy in June 2009. By using the Z-Score, the risk of bankruptcy could have been identified earlier. In 2006, the Z-Score for GM was around 0.50, signifying a high probability of bankruptcy. For the next 3 years, the Z-Score continued to be below the distress threshold, serving as an early warning signal for investors and stakeholders to take precautionary measures.3. Analyzing MCI WorldCom’s Financial Distress:MCI WorldCom, a telecommunications company, filed for bankruptcy in 2002 after being involved in multiple fraudulent activities. In this case, the Z-Score could have been used to examine their financial risk. By the end of 2001, MCI WorldCom’s Z-Score was already around 1.59, a sign of potential financial distress. If investors had monitored the financial ratios used in the Z-Score calculation, they could have recognized early warning signs in the company’s financial performance, potentially avoiding losses due to the bankruptcy.These examples can provide valuable lessons for investors and stakeholders, showcasing the importance of analyzing financial ratios and scores, such as the Z-Score, in order to better assess company performance, financial stability, and bankruptcy risk.

Frequently Asked Questions(FAQ)

What is a Z-Score?

A Z-Score is a statistical measurement used to describe a value’s relationship to the mean (average) of a group of values, typically expressed in terms of standard deviations from the mean. In finance, it is commonly employed to analyze bankruptcy risk by assessing a company’s financial health.

How is the Z-Score calculated in finance?

In finance, the Z-Score is calculated using the Altman Z-Score formula, which combines five financial ratios, each assigned with a weight. The formula is as follows:Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0EWhere:A = Working Capital / Total AssetsB = Retained Earnings / Total AssetsC = Earnings Before Interest and Taxes (EBIT) / Total AssetsD = Market Value of Equity / Total LiabilitiesE = Sales / Total Assets

What do different Z-Score values signify?

Based on the Altman Z-Score model, the following interpretations are commonly used:- Z-Score > 2.99: The company is considered to be in the “Safe Zone,” suggesting a low probability of bankruptcy.- 1.8 < Z-Score < 2.99: The company’s financial situation lies within the “Grey Zone,” indicating a moderate risk of bankruptcy.- Z-Score < 1.8: Companies in the “Distress Zone” have a high probability of bankruptcy.

Is the Z-Score applicable to all companies in the financial analysis?

While widely used, the Z-Score may not be applicable to all industries or companies. It was originally developed for publicly traded manufacturing firms and may not accurately assess bankruptcy probability for companies in other sectors or for private firms due to differences in financial structures and industry-specific factors.

Are there any limitations or drawbacks of the Z-Score?

Yes, the Z-Score has its limitations. Some of the key drawbacks include:- It relies on financial statement data, which can be manipulated or distorted.- It may not be suitable for all industries or company types.- It doesn’t consider external factors such as economic conditions, regulations, or government policies.- It is based on past financial data and may not accurately predict future bankruptcy risk.

Can the Z-Score be used for short-term financial analysis?

While the Z-Score primarily focuses on a company’s financial health over the medium to long-term, it can provide insights into short-term financial conditions. However, it may not be as accurate and effective for short-term financial analysis, as it relies on historical financial data and does not consider sudden changes in the market or the company’s operations.

Related Finance Terms

Sources for More Information

About Our Editorial Process

At Due, we are dedicated to providing simple money and retirement advice that can make a big impact in your life. Our team closely follows market shifts and deeply understands how to build REAL wealth. All of our articles undergo thorough editing and review by financial experts, ensuring you get reliable and credible money advice.

We partner with leading publications, such as Nasdaq, The Globe and Mail, Entrepreneur, and more, to provide insights on retirement, current markets, and more.

We also host a financial glossary of over 7000 money/investing terms to help you learn more about how to take control of your finances.

View our editorial process

About Our Journalists

Our journalists are not just trusted, certified financial advisers. They are experienced and leading influencers in the financial realm, trusted by millions to provide advice about money. We handpick the best of the best, so you get advice from real experts. Our goal is to educate and inform, NOT to be a ‘stock-picker’ or ‘market-caller.’ 

Why listen to what we have to say?

While Due does not know how to predict the market in the short-term, our team of experts DOES know how you can make smart financial decisions to plan for retirement in the long-term.

View our expert review board

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More