This guide is for educational purposes only and does not constitute investment advice. Data sourced from SEC EDGAR filings. Past performance is not indicative of future results. Consult a qualified financial advisor before making investment decisions.
What Is the Altman Z-Score?
The Altman Z-Score is a formula that predicts how likely a company is to face financial distress within the next two years. Developed by Edward Altman at NYU in 1968, it combines five financial ratios from SEC filings into a single number that acts like a traffic light: green (safe), yellow (uncertain), or red (elevated risk).
What the Z-Score Tells You
The Altman Z-Score is a weighted formula that combines five financial ratios to produce a single number indicating a company's likelihood of financial distress. Higher scores mean lower risk.
Think of it like a traffic light for financial health. Edward Altman studied companies that went bankrupt and companies that stayed healthy, then found five financial measurements that best distinguished between them.
The result is a single number. A company scoring above 2.9 shows no signs of distress. Below 1.23, the company shares characteristics with firms that have historically faced serious financial difficulty.
The Formula: 5 Components
Modified Altman Z-Score
Billiver uses the Modified Z-Score (1983 revision for private firms), which uses book value of equity instead of market capitalization.
X2 uses actual retained earnings from SEC 10-K filings. For companies where this data is not available, X2 is excluded. If fewer than 3 of 5 components can be computed, no Z-Score is shown.
Working Capital / Total Assets
Weight: 0.717Measures short-term liquidity. Working capital = Current Assets - Current Liabilities. A company with more short-term assets than short-term debts has a cushion to handle unexpected problems.
Retained Earnings / Total Assets
Weight: 0.847Measures accumulated profitability relative to assets. Retained earnings represent profits kept in the business over its lifetime rather than paid out as dividends. A higher ratio signals long-term financial resilience. Negative values (accumulated deficit) indicate cumulative losses over the company's history.
Operating Income / Total Assets
Weight: 3.107Measures operating efficiency — this is the highest-weighted component. It shows how well the core business generates profit from its asset base, independent of financing decisions and taxes.
Book Value of Equity / Total Liabilities
Weight: 0.42The solvency cushion. Could the owners theoretically cover all debts? A higher ratio means the company has more equity relative to what it owes.
Revenue / Total Assets
Weight: 0.998Asset utilization — how actively is the company using its assets to generate sales? Higher turnover suggests efficient use of resources.
The Three Zones
Low probability of financial distress. The company shows strong fundamentals across all five dimensions.
Uncertain territory. The company is not clearly safe or in trouble. Monitor closely and look at trends over time.
Elevated risk. The company shows characteristics similar to firms that have historically faced financial difficulty.
How to Interpret Results
The Z-Score is most useful when you look at it alongside other metrics rather than in isolation. A company in the Grey Zone with improving trends (score rising year over year) tells a different story than one with deteriorating trends.
Pay special attention to which component is driving the score. A company with a low score primarily because of X1 (low working capital) faces a different challenge than one dragged down by X3 (low operating profitability).
Manufacturing vs. Non-Manufacturing
The original 1968 Z-Score was calibrated on manufacturing companies. Altman's 1983 revised model (used by Billiver) adjusts the weights to work across a broader set of industries, but the formula still performs best for non-financial companies with tangible asset bases.
See It on Billiver
Billiver calculates the Altman Z-Score for every S&P 500 company using data from the latest SEC 10-K filing. You can find it on each company's score page:
You can also use Rankings to find the highest and lowest Z-Scores across sectors.
Limitations
Not designed for financial companies
Banks and insurance companies have fundamentally different balance sheet structures. High leverage is normal for banks by design (deposits are liabilities), so the Z-Score would almost always classify healthy banks as distressed. Billiver includes a disclaimer for financial sector companies.
Single-point snapshot
The Z-Score reflects one moment in time. A company recovering from a difficult period may score low today but be improving rapidly. Always look at the trend over multiple years.
Asset-light businesses
Technology and service companies with minimal tangible assets may produce Z-Scores that are harder to interpret, since the formula was designed for companies with significant physical asset bases.
Not a guarantee
A high Z-Score does not guarantee a company will not face financial difficulty. External shocks, fraud, and rapid market changes can affect any company regardless of its Z-Score.
Data source: SEC EDGAR 10-K filings. Z-Score formula: Altman, E. I. (1968, revised 1983).
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This content is for educational purposes only and does not constitute investment advice. Always consult with a qualified financial advisor for personalized guidance.