Introduction

Suppose, you’re looking at a company’s stock, thinking it looks promising. But underneath, is it solid or just a house of cards? How to answer this question?

That’s where the Altman Z-Score model comes in. For a comprehensive overview of the model, including its history and interpretations, refer to my detailed guide on the Altman Z-Score.

Altman Z-Score gives us a straightforward method to look deeply into a business’s financial health.

I stumbled on it years ago while I was researching about the financial health algorithm of my Stock Engine. Since then, it has been the core of my code.

While I was converting this logic of the Z-score into a code, it felt like flipping on a light in a dim room. No fancy logic; it’s math anyone can follow with basic numbers from a balance sheet.

At its core, the Z-Score mixes five simple ratios into one number. This number, flags bankruptcy risk up to two years out.

• If the scores is over 3? The company is in good shape.
• Between 1.8 and 3? The company must be on your close watch.
• Under 1.8? It is time to walk away.

It’s not foolproof, but it’s helped folks like us to avoid bad bets without overcomplicating things.

In this post, I’ll talk about how to put the data and do a step by step calculation of the Altman-Z score for a company. I’ll also show you the calculation using a real-life example.

What the Z-Score Really Does

Think of the Z-Score as a doctor’s quick pulse check for a company.

Edward Altman worked out this method in 1968 to predict if manufacturers might go bankrupt. But this scoring method works for all sorts of companies.

What is the formula?

Z = 1.2 times the first ratio + 1.4 times the second + 3.3 times the third + 0.6 times the fourth + 1.0 times the fifth.

See the full Altman Z formula here.

Each ratio pulls data from the company’s balance sheet, income statement, and a bit of market info.

Why these weights? Altman crunched data from hundreds of firms and found this mix predicts trouble about 80% of the time.

I think, Altman Z-scoring method is pretty handy for someone new to stocks. It can immediately tell if a stock (underlying company) is playing under the threat of bankruptcy.

I have a Gujju friend who is kind of a new investor (post 2020) who mostly invest in stocks he got as hot tips from his close circle. Many of such stocks are short-lived. Why? Because they eventually fizzle because of hidden debt piles.

The Z-Score can spot such stocks early. It can identify such stocks by seeing its liquidity squeezes, weak profits, etc.

I think, for retail investors like us the Altman Z-score is a low-effort shield.

Let’s start with the step by step calculation method:

Step One: Collecting the Numbers

Start simple. Grab the company’s latest annual report. Open its balance sheet and P&L account.

My app, the Stock Engine, or sites like Yahoo Finance has the information you need. You will need to collect the following metrics:

• Total assets (everything the company owns).
• Working capital (current assets minus current liabilities. Company’s quick cash buffer).
• Retained earnings (net profits – PAT saved up over years).
• EBIT (earnings before interest and taxes. We can also call it core operating profit).
• Total liabilities (all debts owed by the company to banks, etc).
• Market value of equity (stock price times shares outstanding, or just the market cap).
• Total Income (Sales or revenue).

I’ll suggest you to ensure that you have each data for the same financial year. For example, if the data of total assets is from Mar’25 FY, then EBIT must also be from Mar’25 FY only.

Step Two: Start Calculating The Five Ratios

Each of the below five ratios will tell a unique thing about your company. Individually, all of these ratio are extremely powerful numbers (for interpretation). But when it gets combined by the way of Altman’s Z formula, it becomes even more useful.

1. Working capital divided by total assets (CACLTA). Formula: (Current assets – current liabilities) / total assets. This shows if you’ve got enough short-term cash to manage immediate liabilities. Say it’s 0.2 or higher. It’s a decent cushion for surprises like slow-paying customers. If this ratio is below zero? It’s a big Red flag. This is a sign that your company is living hand to mouth.
2. Retained earnings over total assets (RETA). Formula: (Retained earnings / total assets). This formula is like your savings in FD relative to your home’s value. It gets built over time as you save along year after year. Young companies (Start-ups) might show a negative here (no shame). But as an investor, we have to decide is we want to invest in them or not. Now, we have the data. For mature ones, this ratio in tune of 0.4 plus is good. Low scores means the company should trim dividends and reinvest more.
3. Operating Profit over total assets (EBITTA): Formula: (EBIT / total assets). This formula is asking, “How hard are your assets working to make money?” A good company will aim for a number 0.08 or better. It’s the profit engine. In tough times like rising costs, this ratio will dip first. This ratio will start signalling the pivot before it start getting reflected in the P&L report.
4. Market value of equity over total liabilities (MCAPTL). Formula: (Market cap / total liabilities). If the market has lots of money, it will vote a company with its wallet. It shows the investor’s faith against the debt load of the company. If this ratio is over 1, it means investors see strength. If the ratio is below 0.5, investors are getting worried. The ratio above one adds a forward-looking vibe to the stock.
5. Sales over total assets (TRTA). Formula: (Total revenue / total assets). It shows how much money you’re pulling from what you own. If this ratio is 1 or more, the company setup is working fine. The company’s products and services are not rotting in inventory. A score lower than one means that the machines are sitting idle or old inventory gathering dust.

Step Three: Combining them in the formula

Z = 1.2 * CACLTA + 1.4 * RETA + 3.3 * EBITTA + 0.6 * MPATTL + 1.0 * TRTA.

Now, its time to add weights to the calculated ratios.

Multiply each by its factor of 1.2, 1.4, 3.3, 0.6 and 1.0 as shown in the above Altman Z-formula. Finally, add each weighted ratios and you’ll have your Z-Score.

I’l suggest you to use an Excel or Google Sheet to do this math. It will eliminate the chances of calculation mistakes. Moreover, the math will also look much neater. You can also use the same template to calculate Altman Z-score for other stocks.

An Excel/Google Sheet Template

Set up Excel once, and it’s done.

Create columns for inputs:

• Total assets in A1, working capital in A2, and so on down to sales in A7.
• Then, in A9: =A2/A1 for X1. Repeat for others.
• For Z-Score in A15: =1.2A9 + 1.4A10 + 3.3A11 + 0.6A12 + 1*A13.
• Add an IF statement for interpretation: =IF(A15>3,”Safe”,IF(A15>1.8,”Grey”,”Distress”)).
• You can also Color-code cells – green for safe, red for distress.
• I’ll suggest you to save as template, and update inputs each quarter. I’ve used this for client reviews; it takes minutes.

Real Life Example [Tata Steel]

At 2.05, Tata Steel in the grey zone (moderate risk). It is not is dire straits.

The negative working capital drags X1 down, common with integrated steel plants where inventories tie up a lot of their cash. But solid market value and profits keep it from distress.

Compare to peers like JSW Steel; if it dips below 1.8, look at debt cuts. Run this quarterly for trends.

Conclusion

Remember, each step, from grabbing balance sheet numbers to weighting those five ratios, builds a clear picture of hidden strengths or soft spots about your company.

A safe score above 3 whispers “steady growth ahead,” while grey zones nudge you to check debt trends or sales dips common in volatile markets.

It’s not just math; it’s your quiet guide on how to pick quality stocks like a pro. This simple Altman Z-score calculation can save you from surprises.

Apply it quarterly to your holding stocks. You can also compare the scores of peer companies. Closely track how the Altman Z-score of your stocks are changing. Identify those stocks whose scores are gradually falling from above 3 (safe) to below 1.8 levels (Distress).

Have a happy investing.