Altman ZScore Calculator
Table of contents
What is Altman ZScore?How to calculate Altman ZScore? The Altman ZScore formulaHow to interpret the Altman ZScore?FAQsWe designed this Altman ZScore calculator to help you easily calculate the Altman ZScore. Altman ZScore is one of the most famous bankruptcy prediction models. It is widely used to quantify the probability of a company going default.
We prepare this article to help you understand what is Altman ZScore and how to calculate it using the Altman ZScore formula. We will also help you understand what is a good Altman ZScore. However, before we talk about how to interpret the Altman ZScore, let's first make sure we understand the definition of this metric.
What is Altman ZScore?
Altman ZScore is a bankruptcy prediction model designed by Professor Edward Altman in 1968 to quantify the probability of a company going default. The Altman ZScore is the product of the discriminant analysis performed by Professor Altman.
Unlike other bankruptcy predicting methods, the Altman ZScore can incorporate various ratios into a single equation. This allows user to avoid overrelying on a particular financial ratio to assess the credit risks of a company.
The following example will help us to understand the Altman ZScore calculation precisely .
How to calculate Altman ZScore? The Altman ZScore formula
Let's take Company Alpha as an example to help us understand the concept of the Altman ZScore in our Altman ZScore calculator. Company Alpha reports the following information:
 Number of shares outstanding: 1,000,000;
 Share price: $20;
 Dividend per share: $0.50;
 Sales: $10,000,000;
 EBIT: $4,000,000;
 Net income: $1,000,000;
 Accounts receivable: $200,000;
 Accounts payable: $100,000;
 Inventory: $300,000;
 Total assets: $50,000,000; and
 Total liabilities: $20,000,000.
We need to calculate 5 ratios to compute the Altman ZScore. The whole process takes 6 steps:

Calculate net working capital / total assets ratio
This ratio measures the shortterm liquidity risk of a company and is calculated as:
NWC/TA ratio = NWC / TA
,where,
NWC
 Net working capital; andTA
 Total assets.
The
NWC
can be calculated using the formula below:NWC = accounts receivable + inventory  accounts payable
For Company Alpha:
NWC/TA ratio = ($200,000 + $300,000  $100,000) / $50,000,000 = $400,000 / $15,000,000 = 0.008
. 
Calculate retained earnings / total assets ratio
The
RE/TA ratio
measures the accumulated profitability of a company and you can calculate it using the formula below:RE/TA ratio = RE / TA
,where,
RE
 Retained earnings.
The
RE
can be calculated as:RE = net income  dividend per share * number of shares outstanding
For Company Alpha:
RE/TA ratio = ($1,000,000  $0.50 * 1,000,000) / $50,000,000 = $500,000 / $15,000,000 = 0.01
. 
Calculate EBIT / total assets ratio
The next ratio to calculate is the
EBIT/TA ratio
and it measures a company's profitability. Its formula is:EBIT/TA ratio = EBIT / TA
,where,
EBIT
 Earnings before interests and taxes.
For our example:
EBIT/TA ratio = $4,000,000 / $50,000,000 = 0.08
. You can also use our ebit calculator to calculate the EBIT. 
Calculate market value of equity / total liabilities ratio
This ratio tells you about the company's leverage. It is calculated as:
MVE/TL ratio = MVE / TL
,where,
MVA
 Market value of equity; andTL
 Total liabilities.
The formula for
MVE
is:MVE = share price * number of shares outstanding
In our example, Company Alpha's
MVE/TL ratio
is:MVE/TL = ($20 * 1,000,000) / $20,000,000 = $20,000,000 / $20,000,000 = 1.0
. 
Calculate sales / total assets ratio
The last ratio to calculate is the
sales/TA ratio
, which measures a company's ability to generate revenue. The formula for this ratio is:sales/TA ratio = sales / TA
For our example:
sales/TA ratio = $10,000,000 / $50,000,000 = 0.2
.You can also check out our total asset turnover calculator.

Compute the Altman ZScore
Now that we have all the ratios calculated, it's time for us to compute the Altman ZScore. The metric can be calculated using this formula:
Altman ZScore = 1.2 * NWC/TA + 1.4 * RE/TA + 3.3 * EBIT/TA + 0.6 * MVE/TL + 1.0 * sales/TA
The
Altman ZScore
for Company Alpha is:Altman ZScore = 1.2 * 0.008 + 1.4 * 0.01 + 3.3 * 0.08 + 0.6 * 1 + 1.0 * 0.2 = 1.0876
.
How to interpret the Altman ZScore?
In general, when it comes to what is a good Altman ZScore, the higher the score, the better. The higher the Altman ZScore, the lower the probability of a company defaulting.
To put the topic into more context, let's quantify the Altman ZScore. The following are the standard method to interpret the Altman ZScore:
 If the Altman ZScore is lower than 1.81, it means there is a high probability of the company defaulting;
 If the Altman ZScore is higher than 3, it means there is a the probability of the company defaulting is low; and
 If the Altman ZScore is between 1.81 and 3, it means there is no clear indicator, and further analysis is needed to be done to draw a conclusion
As a general rule of investing, it is usually dangerous to base your decision on merely one metric. Hence, always confirm your conclusion by looking at other similar metrics.
What is EBIT?
EBIT stands for earnings before interests and taxes. In short:
EBIT = net income + interest expenses + taxes
.
It is usually interpreted as the operating income.
How is the Altman ZScore equation formed?
Unlike the usual credit analysis models, which are derived qualitatively, the Altman ZScore is a quantitate model. The Altman ZScore formula was designed by Professor Edward Altman and its coefficients are determined using discriminant analysis.³
What is a good Altman ZScore?
As a general rule of thumb, a Altman ZScore that is higher than 3 signifies a healthy company. On the other hand, a Altman ZScore lower than 1.81 means that the probability of the company defaulting is significant.
Can Altman ZScore be negative?
Mathematically, yes, since EBIT and net working capital can be negative. However, this is quite rare as the sales and market value of equity figures are usually a lot larger than these figures.