Z-Score definition

Z-Score is a metric that estimates how close a company is to financial distress or bankruptcy. In corporate finance the term almost always means the Altman Z-Score, a model built to flag the risk of business failure.

The Altman Z-Score combines several weighted financial ratios covering profitability, liquidity, leverage, solvency, and operating efficiency into a single number. A higher score points to stronger financial health; a lower score points to higher bankruptcy risk. In the original model, a score above roughly 3.0 sits in the safe zone and a score below roughly 1.8 sits in the distress zone.

The Altman Z-Score should not be confused with the statistical z-score, also called the standard score. The statistical version measures how many standard deviations a single data point sits from the mean of a set, and applies to any data. The Altman Z-Score is a specific, fixed formula built only for company bankruptcy risk.