KPI: The Altman Z-Score

The Altman Z-Score is a proven financial model used to predict the likelihood of bankruptcy within a 1–2 year window. Developed by economist Edward Altman in 1968, the score consolidates key balance sheet and income statement data into a single number that signals a company’s financial health. A higher score indicates lower financial risk, while a lower score may point to potential distress.

Though originally developed for publicly traded manufacturers, the model has since been adapted for private companies and a broader set of industries.

In the Levelup Financial Intelligence dashboard, the Altman Z-Score is calculated automatically each month using your company’s trailing twelve-month (TTM) financials. We've adapted the traditional model to support private businesses by substituting book value of equity in place of market value, in alignment with the Altman Z’-Score methodology. No setup is required—just ongoing visibility into a vital risk metric.

Altman Z-Score Formula

Z = 1.2(X₁) + 1.4(X₂) + 3.3(X₃) + 0.6(X₄) + 1.0(X₅)

These five inputs combine into a single score—allowing for quick risk classification.

How to Interpret the Score

This simple breakdown makes the Z-Score highly actionable. If a business trends into the grey or distress zone, it may need to reassess its capital structure, improve operating efficiency, or reduce debt levels.

Why It Matters

The Altman Z-Score isn’t just an academic formula—it has real-world implications for how companies manage risk, capital, and growth. Here’s why every finance leader should monitor it:

1. Bankruptcy Risk Assessment

The Z-Score provides a quantified estimate of potential insolvency up to two years in advance, enabling proactive intervention before liquidity problems escalate.

2. Investor and Lender Confidence

A higher Z-Score boosts external confidence. Lenders use it to evaluate creditworthiness. Investors look to it as a proxy for balance sheet strength and business resilience.

3. Liquidity & Leverage Management

By incorporating working capital, retained earnings, and total liabilities, the Z-Score spotlights imbalances in operational liquidity or debt structure—two key stress points in downturns.

4. Industry Benchmarking

Businesses can compare their Z-Scores against sector averages, especially in industries where high capital intensity or thin margins elevate default risk.

5. Risk Mitigation

A low Z-Score gives management the chance to take action: refinance debt, improve margins, restructure operations, or raise equity. Forewarned is forearmed.

Tying Z-Score Into Broader Financial Analysis

While the Z-Score is valuable on its own, it becomes even more useful when tracked alongside KPIs like:

Together, these metrics create a multi-dimensional view of financial stability, with the Z-Score acting as a composite indicator of deeper trends.

Use in Levelup’s Financial Intelligence Application

With Levelup, there’s no need to calculate or configure anything manually. The Z-Score is built into your monthly KPI suite and updates automatically using your latest TTM data.

You’ll benefit from:

This makes the Altman Z-Score not just a number—but a dynamic, actionable insight.

Conclusion: Don’t Wait for the Crisis

The Altman Z-Score transforms complex financial data into a clear signal of risk or stability. By adapting it for private companies and embedding it in your Levelup dashboard, we help you monitor what matters—without requiring extra effort.

Use this KPI to:

As part of our growing KPI series, the Z-Score complements metrics like Gross Profit Margin, Operating Profit Margin, Break-Even Analysis, and others—together delivering actionable financial intelligence for the modern business leader.