The Z-score formula for predicting bankruptcy was developed in 1968 by Edward I. Altman, a financial economist and professor at the Leonard N. Stern School of Business at New York University. The Z-score is a multivariate formula that measures the financial health of a company and predicts the probability of bankruptcy within two years.

Studies measuring the effectiveness of the Z-score have shown the model to be accurate with >70% reliability (Eidleman). The Z-score combines four or five common business ratios using a weighting system calculated by Altman to determine the likelihood of bankruptcy. The weighting system was originally based on data from publicly held manufacturers, but has since been modified for private manufacturing, non-manufacturing and service companies.

The original data sample consisted of 66 firms, half of which had filed for bankruptcy under Chapter 7. All businesses in the database were manufacturers, and small firms with assets of <$1million were eliminated.