Altman Z-score
Principles of Finance glossary · Financial Statements, Markets & Working Capital
Definition
A composite financial-distress predictor (Altman 1968) combining five accounting ratios (working capital, retained earnings, EBIT, and sales scaled by total assets, plus market value of equity to total liabilities) into a single score; Z < 1.81 historically signals high bankruptcy risk for manufacturers.
Altman Z-score in plain English
The Altman Z-score is like a credit-check crystal ball for whether a company is heading toward bankruptcy. A professor named Altman took five simple health signals from a company's financial statements — things like how much cash-cushion it has, how much profit it earns per dollar of stuff it owns, and how much the stock market thinks it's worth versus what it owes — and blended them into one number. The lower the number, the sicker the company: historically a manufacturer scoring below 1.81 was in the danger zone for going broke. It's a quick smell-test, not a guarantee, but it flags trouble before the crash.
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