GLOSSARY

Altman Z-Score

The Altman Z-Score is a financial formula developed by Professor Edward Altman at New York University in 1968. It combines five weighted financial ratios into a single number that estimates the likelihood of a company entering bankruptcy within two years.

Interpreting the Score

A Z-Score above 3.0 places the company in the safe zone, indicating low bankruptcy risk. Between 1.8 and 3.0 is the gray zone where the outcome is uncertain. Below 1.8 is the distress zone, signaling elevated bankruptcy risk that warrants serious caution.

The five ratios measure working capital adequacy, retained earnings accumulation, operating profitability, market value relative to debt obligations, and asset utilization efficiency. Each captures a different aspect of financial resilience.

Fair Price Index uses the Altman Z-Score as a safety check within the FPI Rating. Companies in the safe zone receive a modest bonus. Companies in the distress zone receive a penalty regardless of how well they score on other factors.

EXAMPLE

A company with an Altman Z-Score of 5.24 sits comfortably in the safe zone, indicating minimal bankruptcy risk. This adds 0.3 bonus points to its FPI Rating.

Altman Z-Score: How to Measure Bankruptcy Risk

Learn how the Altman Z-Score predicts bankruptcy risk using five financial ratios. Covers the formula, the three safety zones, the non-manufacturer and emerging-market variants, worked examples, and how to use it alongside valuation.

RELATED TERMS

FPI Rating

A proprietary 0–10 score measuring overall company quality based on six fundamental factors, Piotroski F-Score, and Altman Z-Score.

Piotroski F-Score

A 0–9 scoring system that evaluates a company's financial strength through nine binary accounting tests.

Fair Value

The estimated intrinsic worth of a stock based on fundamental analysis rather than its current market price.

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DISCLAIMER: This glossary is for educational purposes only and does not constitute financial advice. Fair value calculations are estimates based on models and assumptions. Always conduct your own research and consider consulting a financial advisor before making investment decisions.