Altman Z-Score
Corporate Credit Analysis glossary · Credit Metrics & Debt Schedule Modeling
Definition
A multivariate distress prediction model published by Edward Altman (1968) combining five weighted financial ratios: working capital/TA, retained earnings/TA, EBIT/TA, market equity/book liabilities, sales/TA. Z > 2.99 = safe zone, 1.81-2.99 = grey zone, < 1.81 = distress zone.
Altman Z-Score in plain English
Imagine a doctor who checks five vital signs and combines them into one number that says whether a patient is healthy or heading for the ER. The Altman Z-Score does that for companies: it blends five financial ratios (roughly measuring cash cushion, past profits saved up, how much profit the assets earn, how much investors value the company versus its debts, and how hard the assets work to make sales) into a single score. A high score (above about 2.99) means safe, the middle is a wary grey zone, and below about 1.81 warns the company could go bankrupt. It's not a crystal ball, but it was one of the first tools to turn 'this company feels shaky' into an actual, testable number.
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