The KZ index is a relative measure of a company’s dependence on external financing.
KZ Index = -1.001909 x Cash flows / K + 0.2826389 x Q + 3.139193 x Debt / Total capital + -39.3678 x Dividends / K + -1.314759 x Cash / K
Note that the model is a probabilistic model, so it will not perfectly predict which companies are financially constrained and which are not. In any case, it should help raise warning flags.
The higher the KZ index, the more difficult the financial situation will be for a company when financial conditions worsen, as they may have difficulty financing current activities.