Question

The Z score is 2.5. Explicate the meaning of the different determinants of the Z score. Will this company default?

Answer 1

A score of less than 1.8 suggests that a company is headed for bankrupcy.
A score of more than 3 indicates that a company is not likely to be bankrupt and is very safe
Any score in between may be said as that there are some chances of bankrupcy.

For 2.5 there may be some chances of bankrupcy but it is not very likely. The company may default but it is not very likely. However we need to remember that default chances are based on various factors. Z score measures some of them hence it cannot be used as the only tool to predict bankrupcy and needs to be looked in conjunction with various other features.