Estimates the risk of financial distress within two years for publicly traded manufacturing companies.
Formula: Z = 1.2·WC/TA + 1.4·RE/TA + 3.3·EBIT/TA + 0.6·MarketCap/TL + 1.0·Sales/TA
How to read it: Z > 2.99 = Safe Zone · 1.81–2.99 = Grey Zone · Z < 1.81 = Distress Zone. Original model for public manufacturers only; not meaningful for banks or insurers.
Developed by Edward Altman in 1968 on US public manufacturers. In the original sample it classified about 72% of bankruptcies correctly two years before the event. For service, technology, retail and private companies use the Z''-Score instead.