Glossary term
Altman Z-Score
Edward Altman's 1968 bankruptcy-risk composite: five balance-sheet and earnings ratios weighted into one number. Above 2.99 = safe zone, 1.81–2.99 = grey zone, below 1.81 = distress zone.
Definition & Formula
The Z-Score combines five ratios: working capital/assets (×1.2), retained earnings/assets (×1.4), EBIT/assets (×3.3), market value of equity/total liabilities (×0.6) and sales/assets (×1.0). Altman fitted the weights on 1960s manufacturers that did and did not go bankrupt within two years; the classic zones — above 2.99 safe, 1.81 to 2.99 grey, below 1.81 distressed — held up remarkably well out of sample and made the Z-Score the default first-pass solvency screen for half a century.
Where It Breaks
The formula was built for asset-heavy manufacturers. Asset-light software companies and mega-cap technology names can post extreme Z values — a large market capitalization against modest liabilities inflates the fourth term far beyond the calibration range — so a Z of 40 does not mean a company is forty times safer than the threshold. The score is most informative in the middle and low ranges, and for capital-intensive businesses closest to Altman's original sample.
How Closelook Uses It
The Z-Score appears on the stock pages in the established-scores layer with its canonical zones, and its cross-sectional rank feeds the Balance-Sheet module of the Closelook Company Score. We show the literature number as-is — the weighting is Altman's, not ours.