Z score calculator

The “Z” score of a business has a 70% to 80% accuracy in predicting whether it is likely to become insolvent within two years. This could be a particularly useful tool to help evaluate your company’s financial health and that of its customers/suppliers/competitors.

Company accounts

A “Z” score is calculated by using information from a company’s accounts. The information you’ll need is: (1) total assets; (2) earnings before interest and tax (EBIT); (3) net sales; (4) total liabilities; (5) working capital; and (6) retained earnings. You can obtain the latest set of full accounts for a business from Companies House for £1.

The market value of the company is also needed but this won’t be in the accounts. However, it’s easy to find for a quoted company (use the price earnings (P/E) ratio in the Financial Times) and can be estimated for a private company. A rough rule of thumb for valuing a private company would be to use 25% of the P/E ratio of a public company in the same sector and multiply the private company’s profits after tax by that figure.

The Z score uses the following ratios together with a weighting: EBIT/total assets; Retained earnings/total assets; Working capital/total assets; Net sales/total assets; Market value/total liabilities.

Use our Z Score Calculator to evaluate your business and that of your key customers and suppliers.

Reading a z score

For publicly quoted manufacturing business. A “Z” score of 3 or more indicates that it’s unlikely to become insolvent. A score of 1.8 or less indicates that insolvency is likely.

For privately owned manufacturing business. A “Z” score of 2.9 or more indicates that it’s unlikely to become insolvent. A score of 1.23 or less indicates that insolvency is likely.

For privately owned non-manufacturing business. A “Z” score of 2.6 or more indicates that it’s unlikely to become insolvent. A score of 1.1 or less indicates that insolvency is likely.

The “Z” scores are indicative not definitive, so make use of other indicators such as credit reports. EBIT/total assets is the most important ratio in the “Z” score as it is a measure of the company's productivity. Market value/total assets can be difficult to work out for a private business. However, as a default you can use 1 as the score for this ratio.