Altman Z″
6.51 SafeDistress model for emerging markets. Above 2.6 is safe, below 1.1 is the distress zone.
What is this, and how do I read it?
Altman Z″ — distress model — Edward Altman, NYU, 1968; the Z″ variant was published in 1995 for emerging markets and non-manufacturers.
A single score built from four balance-sheet ratios that, together, separated companies that later went bankrupt from those that did not. Altman tested it on manufacturers; the Z″ version drops the sales-to-assets term, which made industrial firms look better than service businesses.
- X1 · Working capital ÷ total assets
- Short-term liquidity. Negative means current liabilities exceed current assets — the company owes more within a year than it holds.
- X2 · Retained earnings ÷ total assets
- Cumulative profitability. A young or serially loss-making company scores low here regardless of this year.
- X3 · EBIT ÷ total assets
- Operating productivity of the asset base, before financing and tax.
- X4 · Net worth ÷ total liabilities
- How far assets can fall before liabilities exceed them.
How to read itAbove 2.6 is the safe zone. Between 1.1 and 2.6 is grey. Below 1.1 is the distress zone. The score is a screen, not a prediction — it tells you which balance sheets deserve a second look.
Where it failsNot meaningful for banks, NBFCs or insurers, whose balance sheets are structurally different. Also unreliable for asset-light businesses, which carry few assets by design, and for holding companies whose value sits in unconsolidated stakes.
