Z-scores reveal to statisticians and traders whether a score is typical for a specified data set or if it is atypical. 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 more accurately.

Edward Altman, a professor at New York University, developed and introduced the Z-score formula in the late 1960s as a solution to the time-consuming and somewhat confusing process investors had to undergo to determine how close to bankruptcy a company was.1 In reality, the Z-score formula that Altman developed actually ended up providing investors with an idea of the overall financial health of a company.

Over the years, Altman continued to reevaluate his Z-score. From 1969 until 1975, Altman looked at 86 companies in distress. From 1976 to 1995, he observed 110 companies. Finally, from 1997 to 1999, he evaluated an additional 120 companies. From his findings, it was revealed that the Z-score had an accuracy of between 82% and 94%.2

In 2012, Altman released an updated version of the Z-score, which is called the Altman Z-score Plus. It can be used to evaluate public and private companies, manufacturing and non-manufacturing companies, and U.S. and non-U.S. companies.3

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

Z-scores reveal to statisticians and traders whether a score is typical for a specified data set or if it is atypical. 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 more accurately.

Edward Altman, a professor at New York University, developed and introduced the Z-score formula in the late 1960s as a solution to the time-consuming and somewhat confusing process investors had to undergo to determine how close to bankruptcy a company was.1 In reality, the Z-score formula that Altman developed actually ended up providing investors with an idea of the overall financial health of a company.

Over the years, Altman continued to reevaluate his Z-score. From 1969 until 1975, Altman looked at 86 companies in distress. From 1976 to 1995, he observed 110 companies. Finally, from 1997 to 1999, he evaluated an additional 120 companies. From his findings, it was revealed that the Z-score had an accuracy of between 82% and 94%.2

In 2012, Altman released an updated version of the Z-score, which is called the Altman Z-score Plus. It can be used to evaluate public and private companies, manufacturing and non-manufacturing companies, and U.S. and non-U.S. companies.3

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