Corporate FinanceFinancial Glossary
Altman Z-Score
Definition
A formula developed by Edward Altman that predicts the probability of a company going bankrupt within two years. It combines five financial ratios (working capital, retained earnings, EBIT, market cap, and sales — all relative to total assets) into a single score.
Why It Matters
A Z-Score below 1.8 signals distress, between 1.8-3.0 is a grey zone, and above 3.0 suggests the company is financially healthy. Investors and creditors use it to assess solvency risk before lending money or buying bonds.