A statistical model, devised in the 1960s by Edward Altman (of New York University), which is used to predict the probability of a company failure or bankruptcy within the next two years, based on multiple discriminatory analysis. The higher the Altman Z-score, the lower that probability. Typically, a company’s Altman Z-score is a positive function of five balance-sheet and profit-and-loss-account measures:

• (net working capital)/ (total assets)
• (retained earnings)/ (total assets)
• (EBIT)/ (total assets)
• (market value of common and preferred shares)/ (book value of debt)
• (sales)/ (total assets)

These factors are then differently weighted to reflect their relative magnitude before being combined into a single figure, i.e., Altman Z-score. A score above three implies that bankruptcy is unlikely; a score below 1.8 indicates that bankruptcy is possible.

The Altman Z-score is also called Z-score or “Zeta“.