Certified Supply Chain Professional (CSCP) Practice Exam

What does a Z-score assess in a financial context?

1. The likelihood of achieving sales targets

2. The risk of bankruptcy based on weighted ratios

3. The company's creditworthiness over time

4. The effectiveness of operational management

The correct answer is: The risk of bankruptcy based on weighted ratios

A Z-score is a financial metric that assesses the risk of bankruptcy by using a combination of weighted financial ratios. It primarily evaluates a company's financial health and stability by analyzing key indicators such as profitability, leverage, liquidity, and operational efficiency, and then combines them into a single score. This score helps determine how likely a company is to go bankrupt within a specific timeframe. The Z-score is particularly useful for creditors, investors, and analysts as it provides a quantitative method for assessing a company’s financial risk. A lower Z-score indicates higher risk, while a higher Z-score signifies lower risk and greater financial stability. This calculation is important in making informed decisions about credit, investment, and competitive positioning in the market. In contrast, assessing the likelihood of achieving sales targets, creditworthiness over time, or the effectiveness of operational management would involve different metrics and analyses, which are not specifically evaluated through the Z-score. These other factors may consider market conditions, historical performance trends, and operational efficiency separately rather than providing a consolidated risk assessment like the Z-score does.