To what extent can the Z-score measure system performance.

Abstract

The Z-score has a rich history of analysing the financial performance of companies. The composite method was originally developed to predict corporate bankruptcy and remains a favoured statistical technique used by institutional and private investors. Their use of Z-score is to forecast the likelihood of a company failing in the next year from its capital structure [history], to predict the company's financial distress or success [future]. Thus, the Z-score serves as a predictor to inform investors' decisions and potentially helps companies make better, more informed decisions regarding their governance and capital structure. Having applied Z-score on multiple occasions and supervised its use by countless undergraduates and postgraduates, there is something intuitively appealing about the technique. When reflecting on the many applications of the Z-score, it is argued that the Z-score also measures the macro and micro-operations of companies and their critical service delivery systems. In this paper, we will present the history of the Z-score, demonstrate how the statistical method works, and argue for its relevance in measuring system and operational performance.