Altman Z-score
Use a historical discriminant score with its proper population
Altman’s original Z-score combines five accounting and market ratios in a discriminant function developed for publicly traded manufacturing firms. Later variants use different populations and coefficients, so the exact version matters. It is a classification score calibrated to historical data, not a universal default probability, and it should not be confused with a standardised statistical z-score.
Use for studying historical bankruptcy classification or as a transparent baseline when the appropriate score variant fits the firm population and required financial ratios can be constructed consistently.
Strengths
- Transparent ratio-based baseline that is straightforward to reproduce
- Connects financial-statement variables to an explicit classification rule
Limitations
- Original calibration population limits transfer to other sectors and periods
- Static cut-offs do not supply a universally calibrated default probability
Know the boundary
The original public-manufacturer formula is not automatically appropriate for banks or private firms, and the score is not a probability.