The Z-Score is a financial scoring method developed by economist Edward Altman in 1968. It combines five ratios derived from the balance sheet and income statement (working capital, reserves, profitability, book value of equity, and revenue) to estimate a company’s risk of default.
Example
In the original version, a Z-score above 2.99 indicates a relatively sound company, and a score below 1.81 indicates a company at risk. In between, the situation warrants monitoring.
Why It’s Important
It provides a quick initial assessment of a client’s financial health based on its published financial statements. It has its limitations (financial statements may be outdated, and the model was designed for the industrial sector), so it is combined with actual payment behavior.
For more information: the practical guide to customer scoring and customer risk management.
See also: financial scoring, customer scoring, customer risk.
