Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Z-Score

What it is:

The Z-score is a financial statistic that measures the probability of bankruptcy

How it works (Example):

The Z-score is used to predict the likelihood that a company will go bankrupt. A company's Z-score is calculated based on basic indicators found on its financial statements (e.g. earnings, assets, liabilities, equity, etc.). Lower and negative Z-scores indicate a higher likelihood that a company will go bankrupt, whereas higher and positive scores indicate that a company will survive.

To illustrate, suppose company XYZ is given a Z-score of 3 and that company ABC is given a Z-score of 1. Of these two, company ABC has the greater likelihood of going bankrupt.

Why it Matters:

The Z-score serves as a critical indicator of a company's financial health and likelihood to survive. Therefore, the Z-score is important in auditing as well as analyzing credit.