What it is:
Altman's Z-score is a financial statistic that is used to measure the probability of bankruptcy.
How it works (Example):
Altman's Z-score is used to determine the likelihood of a company going bankrupt. A company's Altman's Z-score is calculated using basic indicators found on its financial statements (e.g. earnings, assets, liabilities, equity, etc.). Lower and negative Altman's Z-scores that a company is more likely to go bankrupt, whereas higher and positive Z-scores mean that a company will survive.
For example, suppose company XYZ is given an Altman's Z-score of 3 and that company ABC is given an Altman's Z-score of 1. Of these two, company ABC is more likely to go bankrupt.
Why it Matters:
The Altman's Z-score is a vital indicator of a company's financial health and likelihood to survive. Therefore, Altman's Z-score is important in auditing as well as analyzing credit.