Your Complete Altman Z Score Checklist for Stock Analysis
The Altman Z Score is a five-variable formula that predicts whether a company is likely to enter financial distress within two years. Edward Altman published it in 1968 using data from 66 U.S. manufacturers, and it correctly classified 94% of bankrupt firms one year before failure. The number you end up with means something specific: above 2.99 is safe, below 1.81 is distress, and the range between is the grey zone where you need to dig deeper.
This checklist gives you a repeatable process for calculating and interpreting the Altman Z Score on any public company.
Key Takeaways
- The Altman Z Score uses five ratios: working capital/assets, retained earnings/assets, EBIT/assets, market cap/liabilities, and revenue/assets.
- Safe zone is Z above 2.99. Distress zone is Z below 1.81. The grey zone between 1.81 and 2.99 requires additional analysis.
- The model was built for public manufacturers. Use the Z' variant (which drops the revenue/assets ratio) for private companies and non-manufacturing businesses.
- A falling Z score over two or three consecutive quarters is more informative than a single snapshot reading.
- Pair the Altman Z Score with the Piotroski F-Score to distinguish distressed companies with improving fundamentals from those with deteriorating ones.
- The ValueMarkers screener tracks the Altman Z-Score across all 73 global exchanges so you can filter and compare instantly.
Step 1: Gather the Five Financial Inputs
Before you can run the formula, you need data from the most recent annual or trailing twelve-month financial statements. Collect these seven numbers:
- Current assets (from the balance sheet)
- Current liabilities (from the balance sheet)
- Total assets (from the balance sheet)
- Retained earnings (from the balance sheet, stockholders' equity section)
- Earnings before interest and taxes (EBIT, from the income statement)
- Market capitalization (share price multiplied by shares outstanding)
- Total liabilities (from the balance sheet)
- Revenue (from the income statement)
Working capital is not listed separately on most balance sheets, but it is simply current assets minus current liabilities. Calculate it once and store it before moving to the formula.
Step 2: Calculate Each of the Five Ratios
The five variables map directly to the inputs you just gathered.
| Variable | Numerator | Denominator | Weight |
|---|---|---|---|
| X1 | Working Capital | Total Assets | 1.2 |
| X2 | Retained Earnings | Total Assets | 1.4 |
| X3 | EBIT | Total Assets | 3.3 |
| X4 | Market Capitalization | Total Liabilities | 0.6 |
| X5 | Revenue | Total Assets | 1.0 |
Checklist for this step:
- X1 = (Current Assets - Current Liabilities) / Total Assets
- X2 = Retained Earnings / Total Assets
- X3 = EBIT / Total Assets
- X4 = Market Cap / Total Liabilities
- X5 = Revenue / Total Assets
- Verify no division-by-zero errors (total assets and total liabilities must be positive)
Step 3: Apply the Weights and Sum
The formula is: Z = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 1.0(X5)
- Multiply each ratio by its weight
- Sum all five weighted values
- Record the result to two decimal places
A clean example: if your five weighted values are 0.18, 0.38, 0.40, 0.90, and 1.30, the Z score is 3.16, safely in the safe zone.
Step 4: Interpret the Score Against the Three Zones
| Z Score Range | Zone | What It Signals |
|---|---|---|
| Above 2.99 | Safe | Low two-year bankruptcy probability |
| 1.81 to 2.99 | Grey Zone | Elevated risk; investigate further |
| Below 1.81 | Distress | High two-year bankruptcy probability |
Checklist for interpretation:
- Identify which zone the score falls in
- If in the grey zone, check the trend: is the score rising or falling from the prior period?
- If below 1.81, check free cash flow margin; negative FCF with low Z is a red flag
- If above 2.99, note which variable contributes most (X3 is the highest-weighted; X4 uses market data)
Step 5: Choose the Right Variant
The original formula applies to public manufacturing companies. Altman later developed the Z' model for private companies and non-manufacturers.
- Is the company publicly traded? If not, use Z' (replaces market cap with book value in X4)
- Is the company a non-manufacturer (software, finance, retail, services)? If yes, use the Z'' model, which drops X5 entirely
- For financial firms (banks, insurers), note that neither version applies cleanly; use the Piotroski F-Score or sector-specific credit models instead
Step 6: Pair with Complementary Indicators
The Altman Z Score is a distress detector, not a buy signal. Pair it with the following to build a complete picture:
- Free cash flow margin: A negative FCF margin with a Z score below 2.0 is a serious warning. A positive FCF margin with a Z score in the grey zone may indicate a turnaround.
- Piotroski F-Score: The F-Score adds nine binary tests of profitability, use, and efficiency. Companies with Z scores below 2.5 and F-Scores above 7 often represent the best deep-value turnaround candidates.
- ROIC trend: ROIC consistency over three to five years tells you whether the distress is structural or cyclical. Apple's ROIC of 45.1% and Microsoft's 35.2% illustrate what consistent capital efficiency looks like at scale.
- Debt maturity schedule: A low Z score is more dangerous when significant debt matures within 12 to 24 months. Check the notes to the financial statements.
Step 7: Track the Trend Over Time
A single Z score reading is useful. Four quarterly readings are far more useful.
- Pull the Z score for the last four quarters (or last three annual periods)
- Plot or list the values in order
- If the score is trending down by more than 0.3 per quarter, investigate the cause
- If the score is trending up from a distressed level, identify which variable improved most
A company moving from 1.4 to 1.9 to 2.3 over three quarters is telling you something different from a company moving from 3.2 to 2.8 to 2.2. The first may be a turnaround; the second is a deterioration.
Common Mistakes to Avoid
- Using quarterly retained earnings without annualizing EBIT (mix quarterly and annual data and the result is meaningless)
- Forgetting to subtract negative retained earnings (accumulated deficit reduces X2 to negative values)
- Treating goodwill-heavy total assets at face value (goodwill may be worth far less than the balance sheet implies; consider running the Z score on tangible assets for asset-intensive firms)
- Applying the original formula to banks or insurance companies (their balance sheets are structurally different; liabilities are funding sources, not financial distress indicators)
- Ignoring the grey zone (the 1.81 to 2.99 range is where the most interesting investment decisions happen)
Further reading: Investopedia · CFA Institute
Why altman z score formula Matters
This section anchors the discussion on altman z score formula. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply altman z score formula in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for altman z score formula
See the main discussion of altman z score formula in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using altman z score formula alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for altman z score formula
See the main discussion of altman z score formula in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using altman z score formula alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Free Cash Flow Margin (FCF Margin) — Free Cash Flow Margin measures how efficiently a company converts capital into earnings
- Piotroski F-Score — Piotroski F-Score captures the reliability of reported earnings versus underlying cash flow
- Altman Z-Score — Altman Z-Score is the metric used to the reliability of reported earnings versus underlying cash flow
- Altman Z Score Predicting Bankruptcy Before It Happens — related ValueMarkers analysis
- Z Score Formula — related ValueMarkers analysis
- Net Margin And Net Profit Margin — related ValueMarkers analysis
Frequently Asked Questions
how to find the z score using excel
Set up eight input cells for current assets, current liabilities, total assets, retained earnings, EBIT, market cap, total liabilities, and revenue. Then enter the formula: =1.2*((B1-B2)/B3)+1.4*(B4/B3)+3.3*(B5/B3)+0.6*(B6/B7)+1.0*(B8/B3), adjusting cell references to match your layout. The result maps directly to the three zones: above 2.99 safe, 1.81 to 2.99 grey zone, below 1.81 distress.
how to find z score excel
In Excel, the fastest approach is to create a row per company and use absolute cell references for no inputs that repeat across companies. Build the five ratio columns first (X1 through X5), then a final column with the weighted sum formula. This lets you run a batch comparison across 20 or 30 stocks by copying one row down. Sort by the Z score column to immediately see which companies sit in the distress zone.
what is the altman z score
The Altman Z Score is a quantitative bankruptcy prediction model developed by NYU professor Edward Altman in 1968. It combines five financial ratios into a single score using weights derived from discriminant analysis on a dataset of bankrupt and healthy U.S. manufacturers. Scores above 2.99 indicate financial health, scores below 1.81 indicate distress, and the range between is the grey zone. The model achieved 94% predictive accuracy one year before bankruptcy in the original study.
what is altman z score
Altman Z Score and Altman Z-Score refer to the same model. The score gives investors a single number that summarizes a company's financial stability based on working capital, retained earnings, operating profitability, market-based solvency, and asset efficiency. It is one of the most widely used quantitative screens in value investing precisely because it converts five separate ratios into one comparable figure.
how to find z scores in excel
To calculate multiple Altman Z scores in Excel, structure your data with companies in rows and financial inputs in columns. Column A: company name. Columns B through H: current assets, current liabilities, total assets, retained earnings, EBIT, market cap, total liabilities, revenue. Column I: the Z score formula referencing each company's row. Add conditional formatting to highlight rows where the Z score falls below 1.81 in red and between 1.81 and 2.99 in yellow.
what is a piotroski score
The Piotroski F-Score is a nine-point checklist developed by Stanford professor Joseph Piotroski in 2000. It scores a company from 0 to 9 across three categories: profitability (4 tests), use and liquidity (3 tests), and operating efficiency (2 tests). Each test is binary, pass or fail. Scores of 8 or 9 indicate strong fundamentals; scores of 0 or 1 indicate serious weakness. Used alongside the Altman Z Score, the Piotroski F-Score helps distinguish grey-zone companies with improving operations from those continuing to deteriorate.
Screen any stock for the Altman Z Score, Piotroski F-Score, and FCF margin in one place. Open the ValueMarkers screener and filter by Z score zone to find safe companies trading at attractive valuations or grey-zone candidates with improving fundamentals.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
Ready to find your next value investment?
ValueMarkers tracks 120+ fundamental indicators across 100,000+ stocks on 73 global exchanges. Run the methodology above in seconds with our stock screener, or see today's top-ranked names on the leaderboard.
Related tools: DCF Calculator · Methodology · Compare ValueMarkers
Disclaimer: This content is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.