# Altman Z Score Calculator Model

The Altman Z Score calculator model takes five key accounting ratios for a business, weights them according to an industry type, and combines them into a single score (the Z score) to give an indication of the financial health of a business.

Generally, the lower the Z score the greater the chance of failure.

In order to make more use of the Z score, Altman established cut off points or boundaries to enable a business to make predictions. These boundaries classify the business into a safe zone, grey zone, or distress zone.

## Altman Z Score Ratios

The five key accounting ratios used in the Altman Z score calculator are:
1. T1 – Net current assets / Total Assets
2. T2 – Retained earnings / Total Assets
3. T3 – Earnings before interest and tax (EBIT) / Total assets
4. T4 – Market value of equity / Total liabilities
5. T5 – Sales / Total assets

Having calculated the ratios, each one is weighted using preset values according to its industry type and then added together to produce the Altman Z Score.

## Altman Z Score Industry Types and Boundaries

The industry types fall into three categories:

The weighting of each ratio is as follows.

### Public Companies

For a public manufacturing business the Altman Z score formula is set out below:

Altman Z Score = 1.200 T1 + 1.400 T2 + 3.300 T3 + 0.600 T4 + 0.999 T5
The boundaries established by Altman are as follows.
1. Z score > 2.99 – Safe zone
2. 1.80 < Z score < 2.99 Grey zone
3. Z score < 1.80 Distress zone

### Private Companies

For a private manufacturing business the Altman Z score formula is set out below:

Altman Z Score = 0.717 T1 + 0.847 T2 + 3.107 T3 + 0.420 T4 + 0.998 T5

The boundaries established by Altman are as follows.

1. Z score > 2.9 – Safe zone
2. 1.23 < Z score < 2.9 Grey zone
3. Z score < 1.23 Distress zone

### Non-Manufacturing Companies

For a non-manufacturing business the Altman Z score formula is set out below:

Altman Z Score = 6.56 T1 + 3.26 T2 + 6.72 T3 + 1.05 T4

The boundaries established by Altman are as follows.

1. Z score > 2.6 – Safe zone
2. 1.1 < Z score < 2.6 Grey zone
3. Z score < 1.1 Distress zone

## Using the Altman Z Score Calculator

The Excel Altman Z score calculator, available for download below, calculates the Z score by entering details relating to the balance sheet and income statement of the business as follows:

• Enter the balance sheet items. Using the balance sheet of the business, enter values for current assets, total assets, current liabilities, total liabilities, market value of equity, and retained earnings.
For a private business where the shares are not quoted, use the book value of the equity instead of market value.
• Enter the income statement items. Using the income statement, enter values for revenue, and earnings before interest and tax (EBIT) (enter a negative figure if this is a loss).
• Altman Z score calculation. The Altman Z score calculator calculates the Z score and based on that score, indicates the Z score zone the business is currently in.