What is a ‘Z-Score’

A Z-score is a numerical measurement of a value’s relationship to the mean in a group of values. If a Z-score is 0, it represents the score is identical to the mean score.

Explaining ‘Z-Score’

Z-scores also reveal to statisticians and traders if a score is typical for a specified data set or if it is atypical. In addition to this, Z-scores also make it possible for analysts to adapt scores from various data sets to make scores that can be compared to one another accurately. Usability testing is one example of a real-life application of Z-scores.

The Altman Z-Score Formula

The Altman Z-score is the output of a credit-strength test that helps gauge the likelihood of bankruptcy for a publicly traded manufacturing company. The Z-score is based on five key financial ratios that can be found and calculated from a company’s annual 10K report. The calculation used to determine the Altman Z-score is as follows:

Altman Z-Score Plus

Altman developed and released the Altman Z-Score Plus in 2012. This formula is used to evaluate both public and private companies and can be used for non-manufacturing companies as well as manufacturing companies. The Z-Score Plus is suitable for companies in the United States as well as companies outside of the United States.

Further Reading

  • Predicting financial distress of companies: revisiting the Z-score and ZETA® models – www.elgaronline.com [PDF]
  • Z-score models' application to Italian companies subject to extraordinary administration – papers.ssrn.com [PDF]
  • Financial Distress Prediction in an International Context: A Review and Empirical Analysis of Altman's – onlinelibrary.wiley.com [PDF]
  • The portability of Altman's Z-score model to predicting corporate financial distress of Slovak companies – www.tandfonline.com [PDF]
  • Applying Z-score model to distinguish insolvent construction companies in China – www.sciencedirect.com [PDF]
  • Understanding financial distress among listed firms in Nairobi stock exchange: A quantitative approach using the Z-score multi-discriminant financial analysis model – ir.jkuat.ac.ke [PDF]
  • Bank insolvency risk and different approaches to aggregate – www.tandfonline.com [PDF]