﻿ Z-score | Definition and Meaning | Capital.com
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

Country Select Country
Entity The products and services listed on this website are not available to US residents.

# What is a Z-score?

Reviewed by Vanessa Kintu

Fact checked by Paul Sorene

Z-score is the measurement of a number’s relationship to the mean of a group of numbers.

Let’s discuss in further detail what Z-score means and how to calculate a Z-score.

In finance, investors use Z-scores to determine a company’s overall health. A Z-score is the measure of standard deviation from the mean of a set of numbers. Z-scores will range from -3 standard deviation to +3 standard deviation. If a Z-score of a value is 0, it indicates that the value is identical to a set of numbers it is compared against. A Z-score of 1.0 indicates the value is one standard deviation from the mean.

## How Z-scores works

Z-scores are often referred to as the Altman Z-score, after New York University professor Edward Altman who developed the Z-score formula in the late 1960s to determine a company’s risk of bankruptcy. In 2012, he released an updated version of the formula called the Altman Z-score Plus, which is used to evaluate public and private companies worldwide.

The Z-score also provides investors with clues in order to evaluate a company’s financial health. Today, Z-score formulas are also used to determine a stock’s volatility relative to its historic mean, the broader market mean and counterparts.

## How is Z-score calculated

In simple terms, Z-score gives us an idea how far a value is from its mean. Let’s look at the basic Z-score formula before moving on to Altman’s Z-score formula.

Z-score = (x - mean) / standard deviation

To provide a Z-score example, consider a company that has reported average full-year revenue of \$100m over the last decade with a standard deviation of 10. Let’s say the company reports full-year revenue of \$120m in the current financial year. The Z-score using the formula will be:

Z-score = (120 - 100) / 10 = +2.

A Z-score of +2 is indicative that the value under consideration is higher than the mean.

The Altman Z-score formula is more complex:

1.2A + 1.4B +3.3C +0.6D +1.0 E

A = Working capital of company / total assets of company

B = Retained earnings of company / total assets of company

C = Earnings before interest and taxes (EBIT) of company / total assets of company

D = Market value of equity of company / book value of total liabilities of company

E = Sales of company / total assets of company

An Altman Z-score of below 1.8 indicates that a company may be at risk of bankruptcy. A score close to 3 indicates a financially sound company. The five financial ratios required to calculate an Altman Z-score can be retrieved from the company's annual 10-K report.

## Z-score explained: Criticism

Z-scores are not always accurate. They can misrepresent a company’s financials. Z-scores can swing between different quarters. It varies when accounting exceptional, one-time profits, losses and write-offs. Furthermore, Z-scores are not effective for new companies with little public history of their finances. It is also not effective with companies making little or zero earnings.

Latest video