What is the Z-Score?

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

How Does the Z-Score Work?

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 Does the Z-Score Matter?

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.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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