The Altman Z-Score is an indicator that estimates a company's bankruptcy risk from five financial ratios. A Z-Score above 3 indicates a safe zone; below 1.8, the risk of default is high.
How does the Altman Z-Score work?
Developed by Edward Altman in 1968, it combines five ratios measuring liquidity, cumulative profitability, operating profitability, financial structure and asset turnover. Each is weighted and then summed.
What are the interpretation thresholds?
What are the limits?
The classic thresholds are poorly suited to tech companies and financials. Apple, for example, shows a very high Z-Score despite low book equity, because it is cash-rich. Adapt the reading to the sector.
How to integrate it into an analysis?
The Z-Score is a safeguard: it serves to rule out distressed companies even before looking at valuation. A stock may look cheap precisely because the market is anticipating its default.
This is not investment advice.