Classic public-manufacturer formula
A commonly used rounded form is:
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
- X1: working capital / total assets
- X2: retained earnings / total assets
- X3: earnings before interest and taxes / total assets
- X4: market value of equity / total liabilities
- X5: sales / total assets
Use ratios as decimals, so 10% is 0.10. Do not mix these coefficients with percentage-scaled inputs.
Interpreting the result
Common reference bands for this version place scores below 1.81 in a distress range, 1.81-2.99 in an intermediate range, and above 2.99 in a lower-distress range. These are screening bands, not guarantees or personal bankruptcy probabilities.
Hypothetical example: A score of 2.4 falls in the intermediate band and calls for further investigation.
Model limits
Private-company and nonmanufacturing variants use different inputs, coefficients, or thresholds. Do not apply the classic model indiscriminately to banks, insurers, startups, or every industry.
Accounting quality, reporting dates, market values, and economic conditions affect interpretation. Use the result alongside cash forecasts and qualitative review. A low score does not establish insolvency or authorize collection escalation.
Research reference: Altman's original 1968 paper.