What ratio is retained earnings divided by total assets, used in the Altman Z-score?

The ratio retained earnings divided by total assets, used in the Altman Z-score, is the retained earnings to total assets ratio.

In the original Altman model, this is X₂ = retained earnings ÷ total assets. It indicates how much internally accumulated profit a company has built relative to its asset base. Because retained earnings accumulate over time, the ratio can also reflect a company’s age, profitability history, and ability to finance operations from past earnings.

Edward I. Altman published the bankruptcy-prediction model in 1968. The original version combined five weighted ratios: working capital to total assets, retained earnings to total assets, earnings before interest and taxes to total assets, market value of equity to liabilities, and sales to total assets.

The main quiz trap is confusing X₂ with the other balance-sheet ratios. Working capital to total assets measures liquidity, sales to total assets measures asset turnover, and market value of equity to liabilities adds a market-based leverage signal. Later Z-score variants use different coefficients and are designed for private companies or non-manufacturers, but the retained-earnings component remains a familiar part of the framework.