Altman Z-Score — will this company survive?
In 1968, American professor Edward Altman developed a model to predict which companies were likely to go bankrupt. He tested it on hundreds of companies and found it was accurate about 80% of the time two years before a bankruptcy actually happened.
Written by Shahzeb Malik
What the score means
What goes into the calculation
The Z-Score combines five financial ratios, each measuring a different aspect of financial health:
Working capital to total assets — Does the company have enough short-term liquidity relative to its size?
Retained earnings to total assets — Has the company built up earnings over time or been running on borrowed money?
Operating profit to total assets — How efficiently is the company generating profit from its assets?
Market cap to total liabilities — What does the market think the company is worth relative to what it owes?
Revenue to total assets — How effectively is the company using its assets to generate sales?
A real-world example
TCS has a very high Altman Z-Score — typically above 10. This makes complete sense: large cash reserves, decades of accumulated profits, very high margins, a large market cap relative to minimal debt, and high revenue per rupee of assets.
A heavily indebted steel manufacturer during a downturn might score 1.5 — in the distress zone — not necessarily because it will go bankrupt, but because the financial stress is real. The Z-Score quantifies that stress before it becomes a crisis.
Important limitations
The Altman Z-Score was designed for manufacturing companies. It is less reliable for:
Banks and financial companies — their balance sheets look very different because debt is their raw material, not a risk factor. Do not use Z-Score for banks.
New-age loss-making companies — companies like Zomato in their early years show poor Z-Scores simply because they have not yet built retained earnings. This does not mean they are about to go bankrupt.
Pure holding companies — the ratios do not translate well to companies whose main asset is shares in other companies.
How to use it in practice
Z-Score works best as a screening tool and a warning flag. When comparing two similar companies and one scores 2.0 while the other scores 4.5 — pay attention to that difference. The first company is carrying more financial risk.
When a company's Z-Score has been declining consistently for three years — from 4 to 3 to 2 — that trend is more informative than any single reading. And when a distress-zone company is also showing rising debt, falling revenue, and pledged promoter shares — the Z-Score is telling you something the headlines have not caught up to yet.
See it in practice
This article is for educational purposes only. It is not investment advice and does not constitute a recommendation to buy, sell, or hold any security. Please consult a SEBI-registered investment adviser before making any investment decision.