Z-score is a statistical measurement that predicts the likelihood of a company going bankrupt. Developed by Edward Altman in the 1960s, the formula assesses the financial health of a company by combining several financial ratios and metrics, including profitability, leverage, liquidity, solvency, and activity ratios.Â
Investors can use Altman Z-score Plus to evaluate corporate credit risk. A score below 1.8 signals the company is likely headed for bankruptcy, while companies with scores above 3 are not likely to go bankrupt
Will Kenton, writer at Investopedia
In Simpler Terms
Think of a Z-score as a credit score for businesses. Just as your personal credit score takes into account your payment history, debts, and credit usage to predict your ability to handle future credit, the Z-score evaluates a company’s financial data to predict its ability to stay afloat financially. A high Z-score means the company is financially healthy, much like a high credit score suggests good personal financial health.
While the Z-score is a powerful tool, it’s not infallible. It’s based on historical data and financial models, which means it can’t predict the future with complete certainty. External factors, like market changes or new competitors, can also impact a company’s financial health.
