Which composite financial ratio uses five components to predict bankruptcy?

The composite financial ratio that uses five components to predict bankruptcy is the Altman Z-score.

Edward I. Altman published the original model in 1968 after applying multiple discriminant analysis to matched samples of failed and surviving companies. Its five components measure working capital, retained earnings, EBIT, market value of equity relative to liabilities, and sales, each scaled by an asset or liability measure and assigned a statistical weight.

The original equation is Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5. In the classic interpretation, scores above 2.99 are in the “safe” zone, scores below 1.81 are in the distress zone, and the interval between them is the grey zone.

The original model was designed for publicly traded manufacturing companies, so later Z′ and Z″ versions adapted it for private, non-manufacturing, and emerging-market firms. It is a screening model, not a guarantee: industry structure, accounting differences, market conditions, and financial-company balance sheets can limit its reliability. The Ohlson O-score and Springate S-score are different bankruptcy models.