Altman Z-Score Calculator

This calculator applies Edward Altman's bankruptcy prediction model to a set of financial statements. Altman built it in 1968 by taking companies that had failed and companies that had not, and working out statistically which combination of financial ratios best separated the two groups. The result was a single weighted score with defined bands, and it has remained in use ever since, by lenders assessing credit, auditors considering going concern, and owners wanting an outside view of their own balance sheet. The default here is the Z″ variant, because that is the one built for private and non-manufacturing companies, which describes almost every New Zealand SME. The original 1968 model needs a market value of equity that a private company does not have, and it was calibrated on listed manufacturers, so applying it to a private firm produces a number that looks precise and means very little. You can still select it, along with the Z′ private manufacturing variant, and each carries its own zone thresholds because the coefficients differ. The calculator shows not just the score but what each component contributed, which is the part that makes it actionable: a weak score caused by thin working capital calls for a different response than one caused by leverage. This is a screening indicator, not a verdict, and not financial or legal advice.

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What The Z-Score Is Actually Measuring

Altman's insight was that no single ratio predicts failure well, but a weighted combination of a few does. He took a sample of manufacturers that had gone bankrupt and a matched sample that had not, tested which financial ratios separated the two groups most reliably, and used discriminant analysis to assign each a weight. The output is a single number with cut-off points calibrated against the original data.

The four ratios in the Z″ model each capture something distinct. Working capital over total assets measures short-term liquidity: whether the business can meet what falls due. Retained earnings over total assets measures cumulative profitability and, implicitly, age and self-funding. EBIT over total assets measures whether the assets actually generate operating profit. Book equity over total liabilities measures how much cushion sits between the creditors and insolvency.

A business can be weak in one and strong in others. That is exactly why the combined score is more informative than any single ratio, and why the component breakdown matters more than the headline number.

Choosing The Right Variant Matters More Than People Realise

There are three published models and they are not interchangeable. Using the wrong one gives a number that looks authoritative and is not comparable to any published threshold.

The original 1968 Z was fitted on listed manufacturers and includes the market value of equity over total liabilities. A private company has no market value of equity. Substituting book value gives a different distribution of scores, which is precisely why Altman published a separate model rather than telling people to substitute.

The Z′ model re-estimated the coefficients for private manufacturers, replacing market value with book value throughout, and shifted the thresholds accordingly.

The Z″ model went further for non-manufacturers and private firms. It drops the sales to total assets ratio entirely, because asset intensity varies so much between industries that including it makes a service business and a factory incomparable. That leaves four terms with much larger coefficients, and thresholds of 1.1 and 2.6. For a New Zealand accounting practice, building company, retailer or consultancy, this is the model to use.

Worked Example: A Score Of 3.05

Take the defaults, which describe a reasonably typical established New Zealand SME. Total assets are $1,450,000.00 and total liabilities $780,000.00, so book equity is $670,000.00. Current assets of $620,000.00 against current liabilities of $410,000.00 give working capital of $210,000.00. Retained earnings stand at $185,000.00 and EBIT for the year was $168,000.00.

The four terms work out as follows. Working capital over assets is 0.1448, weighted at 6.56, contributing 0.9501. Retained earnings over assets is 0.1276, weighted at 3.26, contributing 0.4159. EBIT over assets is 0.1159, weighted at 6.72, contributing 0.7786. Equity over liabilities is 0.8590, weighted at 1.05, contributing 0.9019.

Added together the score is 3.05, comfortably above the 2.6 safe zone threshold.

The component view is where the interest lies. Liquidity and the equity cushion are carrying the score almost equally, at 0.95 and 0.90. The retained earnings term is the weakest at 0.42, which is typical of a business that has been distributing most of its profit rather than accumulating it. If this owner wanted a more robust score, retaining more earnings would be the most direct route, and it would also be the one that genuinely reduces failure risk rather than simply flattering the ratio.

Where The Score Misleads For Small Businesses

The model was built on large firms with audited accounts, and several features of small New Zealand company balance sheets can distort it.

Shareholder current accounts. Money the owner has left in the business may be shown as a liability, which depresses both the equity term and the score, even though in practice the owner is unlikely to demand it back and force a failure. Where the account is genuinely subordinated, treating it as quasi-equity gives a fairer picture, but be honest about which you are doing.

Owner remuneration. If the owner takes drawings or dividends rather than a market salary, EBIT is overstated relative to a business that pays its people properly. Our EBITDA calculator helps normalise this if you want a like for like figure.

Age. The retained earnings term systematically penalises young companies. A profitable two year old business simply has not had time to accumulate, so it can score in the grey zone while trading perfectly well. This is a known characteristic of the model rather than a signal.

Revaluations. A property revaluation inflates total assets, which sits in the denominator of three of the four ratios and mechanically lowers the score, even though the business is arguably stronger.

What To Do With A Weak Score

Read the components rather than the total. Each points somewhere different.

A weak working capital term is a liquidity problem, and the levers are debtor days, stock levels, supplier terms and unbilled work. Our cash conversion cycle calculator traces where the money is trapped.

A weak EBIT term is a trading problem and no amount of balance sheet management fixes it. Pricing, margin and overhead recovery are where to look.

A weak equity term is leverage, and the honest answer is usually more equity or retained profit rather than restructured debt, though extending terms can buy time.

Finally, remember what actually has legal force in New Zealand. The Z-Score is an analytical tool with no statutory status. What directors are required to satisfy themselves about, before any distribution, is the two-limb solvency test in section 4 of the Companies Act 1993, being whether the company can pay its debts as they fall due and whether assets exceed liabilities including contingent liabilities. A poor Z-Score is a good prompt to run that test carefully.

Related NZ Business Health Calculators

• Current Ratio Calculator: the liquidity ratio behind the working capital term.
• Debt to Equity Ratio Calculator: the leverage measure behind the equity term.
• Working Capital Calculator: size and analyse the working capital figure used above.
• Quick Ratio Calculator: a stricter liquidity test that excludes stock.
• Z-Score Calculator: the unrelated statistical measure, if that is what you were looking for.