The Altman Z-score is a weighted measure of a company’s financial strength. The weighting is made up of several factors. The Altman Z-score gets its name from the mathematician that published the theory, Edward I Altman. However it is often shortened to the Z-score these days.
There are a number of financial strength measures but the Z-score is proven and often used as a measure of financial strength against a company’s ability to avoid bankruptcy. The original paper containing the formula was published in 1968 but has been revised and updated more recently. The formula below comes from the revised paper by Edward I Altman in 2000 entitled revisit the z-score and his proprietary model.
Z = 0.72X1 + 0.85X2 + 3.1X3 + 0.42X4 + X5
X1 = working capital/total assets
X2 = retained earnings/total assets
X3 = EBIT/total assets
X4 = market value of equity/book value of debt
X5 = sales/total assets
Edwards I Altman paper uses more accurate figures than these stated. Figures have been simplified to two significant figures for ease of calculation. If users need more accurate figures we suggest reading the published work itself.