TITLE:
Analyzing the Dimensions of Altman Z’-Model
AUTHORS:
Erkki K. Laitinen, Teija Laitinen
KEYWORDS:
Altman Z’-Score, Financial Distress Prediction, Private Firms, Financial Ratios, Profitability, Growth, Sensitivity Analysis, Mathematical Model
JOURNAL NAME:
Theoretical Economics Letters,
Vol.16 No.6,
November
9,
2026
ABSTRACT: The objective of the study is to analyze the underlying operational and financial fundamentals of the five financial ratios in Altman’s model for private firms and their weighted composite index, Z’-Score. This analysis is made using a mathematical long-term steady-state model. The model is based on six parameters: internal rate of return, growth rate, revenue lag, fraction of debt in external capital raised, and ratios of current assets and current liabilities. The study uses partial derivatives and elasticities, complemented by numerical analyses to show the sensitivity of the five ratios and Z’-Score to parameters in both non-failed and failed firm contexts. The results show that internal rate of return, revenue lag, and growth rate exert the dominant influence on the five ratios and Z’-Score. The study offers a new perspective for assessing the applicability and limitations of the Altman Z’-Score model in private-firm settings.