What is Z-Score?
A formula predicting the probability of a company going bankrupt within two years.
Think of it like this
Like a financial health check-up that predicts if a company might 'get sick' (go bankrupt) soon.
Formula
Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E- A: Working Capital/Assets: Liquidity relative to size
- B: Retained Earnings/Assets: Cumulative profitability
- C: EBIT/Assets: Operating profitability
- D: Market Cap/Liabilities: Market confidence vs debt
Why it matters
- Developed by NYU professor Edward Altman in 1968
- Accurately predicted 80-90% of bankruptcies
- Quick assessment of financial distress risk
- Used by creditors and investors worldwide
What's a good value?
> 2.99
Safe Zone
Low bankruptcy risk
1.81-2.99
Grey Zone
Some risk, needs monitoring
< 1.81
Distress Zone
High bankruptcy probability
< 0
Critical
Severe financial distress
Real-world example
Enron's Z-Score was in the distress zone for years before its collapse.
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