A. The Z Score is an important tool for the analyst to use. It is very important to be able to first calculate the score, but even more importantly to be able to interpret the results. For instance, in the text we are given the guideline of 2.675 as being the standard by which firms can be judged. If a firm has a Z Score below 2.675 then the assumption is the firm may possess characteristics similar to a firm that is likely to fail in the near future. Thus, the Z Score provides some measure of the expectation that a firm will go into bankruptcy. A Z Score in excess of 2.675 indicates the firm has the characteristics of a firm that is likely to continue to succeed into the future.
It may be very difficult to complete analysis of different firms that may have a wide range of Z Scores. For instance, we may find it difficult to compare a firm with a 2.65 Z Score with one that has a 2.85 Z Score, or to compare one with a Z Score of 3.00 to one with a Z Score of 3.10.
What are your thoughts on this type of comparisons?
B. Would you invest in Apple? We all speak numbers and feel a little bit better when the numbers are in our favor but we never know where they may or may not go. A publicly traded company with a Z score below 1.8 is nearing bankruptcy but Apple has calculated a 4.16 Z score. Is this a safe investment? What are your thoughts?