Z Score

What is the Altman Z-Score?

A Z-Score (sometimes called the Altman Z-Score) is an early form of credit scoring developed in the US to predict company failure. The Z-Score was devised in 1968 by Edward Altman, a financial economics professor at the Leonard N. Stern School of Business at New York University. A set of five common financial ratios are combined in a weighted system to statistically asses the likelihood of a company going bankrupt within two years.

The score was originally developed for the manufacturing industry, but was then expanded to cover all business types. A precursor to the Credit Scoring techniques used today which are used to predict the likelihood of someone defaulting on a payment, the Z-Score is now rarely used, but is still widely known.


Q: Is it still used?

A: Very rarely, for the most part they have been replaced by the credit scores used widely by lenders. Some businesses find that other scoring models better suit their needs, as there are now many more variables to consider.

The Z-score is often cited as being one of the quickest and simplest methods for predicting corporate bankruptcy, making it one of the most widely understood and used models.

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