What is Altman Z-Score?
The Altman Z-Score is a statistical model developed by Edward Altman in 1968 that combines five financial ratios into a single score predicting the likelihood of a company entering bankruptcy within two years.
How It Works
- Calculate working capital ÷ total assets.
- Calculate retained earnings ÷ total assets.
- Calculate EBIT ÷ total assets.
- Calculate market value of equity ÷ total liabilities.
- Calculate sales ÷ total assets, then weight and sum the five ratios using the original Altman coefficients.
Saudi Context
Saudi credit analysts use the Altman Z-Score as a screening tool for Tadawul-listed companies and large unlisted borrowers. SAMA-regulated banks complement the score with their internal probability of default models calibrated to Saudi sectors.
Example
A manufacturer reports a Z-Score of 1.4 — inside the distress zone (below 1.81 for public manufacturers). The score triggers a deeper credit review, tighter covenants, and a higher provision for the customer.