# Altman Z-Score Calculator

By Wei Bin Loo
Last updated: Jun 24, 2021

We designed this Altman Z-Score calculator to help you easily calculate the Altman Z-Score. Altman Z-Score 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 Z-Score and how to calculate it using the Altman Z-Score formula. We will also help you understand what is a good Altman Z-Score. However, before we talk about how to interpret the Altman Z-Score, let's first make sure we understand the definition of this metric.

## What is Altman Z-Score?

Altman Z-Score is a bankruptcy prediction model designed by Professor Edward Altman in 1968 to quantify the probability of a company going default. The Altman Z-Score is the product of the discriminant analysis performed by Professor Altman.

Unlike other bankruptcy predicting methods, the Altman Z-Score can incorporate various ratios into a single equation. This allows user to avoid over-relying on a particular financial ratio to assess the credit risks of a company.

The following example will help us to understand the Altman Z-Score calculation precisely .

## How to calculate Altman Z-Score? The Altman Z-Score formula

Let's take Company Alpha as an example to help us understand the concept of the Altman Z-Score in our Altman Z-Score 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 Z-Score. The whole process takes 6 steps:

1. Calculate net working capital / total assets ratio

This ratio measures the short-term liquidity risk of a company and is calculated as:

`NWC/TA ratio = NWC / TA`,

where,

• `NWC` - Net working capital; and
• `TA`- 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`.

1. 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`.

1. 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`.

1. 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; and
• `TL` - 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`.

1. 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`.

1. Compute the Altman Z-Score

Now that we have all the ratios calculated, it's time for us to compute the Altman Z-Score. The metric can be calculated using this formula:

`Altman Z-Score = 1.2 * NWC/TA + 1.4 * RE/TA + 3.3 * EBIT/TA + 0.6 * MVE/TL + 1.0 * sales/TA`

The `Altman Z-Score` for Company Alpha is:

`Altman Z-Score = 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 Z-Score?

In general, when it comes to what is a good Altman Z-Score, the higher the score, the better. The higher the Altman Z-Score, the lower the probability of a company defaulting.

To put the topic into more context, let's quantify the Altman Z-Score. The following are the standard method to interpret the Altman Z-Score:

• If the Altman Z-Score is lower than 1.81, it means there is a high probability of the company defaulting;
• If the Altman Z-Score is higher than 3, it means there is a the probability of the company defaulting is low; and
• If the Altman Z-Score 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.

## FAQ

### 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 Z-Score equation formed?

Unlike the usual credit analysis models, which are derived qualitatively, the Altman Z-Score is a quantitate model. The Altman Z-Score formula was designed by Professor Edward Altman and its coefficients are determined using discriminant analysis.

### What is a good Altman Z-Score?

As a general rule of thumb, a Altman Z-Score that is higher than 3 signifies a healthy company. On the other hand, a Altman Z-Score lower than 1.81 means that the probability of the company defaulting is significant.

### Can Altman Z-Score 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.

Wei Bin Loo
Net working capital
Accounts receivable
\$
Inventory
\$
Accounts payable
\$
Net working capital
\$
Market value of equity
Number of shares outstanding
Share price
\$
Market value of equity
\$
Retained earnings
Net income
\$
Dividend per share
\$
Retained earnings
\$
Altman Z-Score
Sales
\$
EBIT
\$
Total assets
\$
Total liabilities
\$
Altman Z-Score
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