The Z-score was developed by Edward Altman in the 1960’s. Frankly, it is a very fast and easy (or should be) statistical calculation to measure the health of a business or organization. Altman built a formula that takes into account many of the most common ratios business and financial professionals use daily. When I worked as a Price Waterhouse auditor many years ago, our managing partner required me to calculate the Z-score and place it at the very beginning of every financial statement examination I performed.
So what is a Z-score? Simply put, the Z score is a snapshot of organizational financial health. The lower the score the more likely the organization is heading toward insolvency. Keep in mind, the Z-score is just a ratio and is best used when comparing one company to another or looking at the trend in Z-scores over many balance sheet dates. This ratio is not perfect and is not a detector of fraud, nor is it a useful ratio for early stage enterprises with little to no profit margin.
In my career, I have found the Z-score useful as a preliminary step toward analyzing a company and as a good indicator of where to dig further in company financials to unravel mysteries.
Read this Investopedia article to learn more about How to Calculate a Z-Score or contact Harvard Grace Corporation at stewart.heath@harvardgrace.com.