What is Piotroski Score?

It is not always certain that how can one evaluate a company’s financial position. Merely looking at the company’s profitability is not concrete enough at times to base your financial decisions. Different weighing factors may take you down a different path altogether and then there is a choice among 1000’s of different stocks to choose from. Joseph Piotroski, an accounting professor at Stanford came up with a theory of the Piotroski F-score.

The Piotroski score is a discrete score between zero and nine that reflects nine different criteria that are used to determine the strength of an organization’s financial position.

The F-Score is used to determine the best value stocks. The stock with a score of nine being the best and zero being the worst in the category.

The F-Score works in a simple fashion; data of various aspects are focused on the company’s accounting results over the last couple of years. For every criterion met, one point is awarded, otherwise, no points are awarded. The points are then added up to determine the best value stocks.

The score is calculated based on 9 criteria divided into 3 groups precisely:

Profitability

• Return on Assets (1 point if it is positive in the current year, 0 otherwise)
• Operating Cash Flow (1 point if it is positive in the current year, 0 otherwise)
• Change in Return of Assets (ROA) (1 point if ROA is higher in the current year compared to the previous one, 0 otherwise)
• Accruals (1 point if Operating Cash Flow/Total Assets is higher than ROA in the current year, 0 otherwise)

Leverage, Liquidity, and Source of Funds

• Change in Leverage (long-term) ratio (1 point if the ratio is lower this year compared to the previous one, 0 otherwise)
• Change in Current ratio (1 point if it is higher in the current year compared to the previous one, 0 otherwise)
• Change in the number of shares (1 point if no new shares were issued during the last year)

Operating Efficiency

• Change in Gross Margin (1 point if it is higher in the current year compared to the previous one, 0 otherwise)
• Change in Asset Turnover ratio (1 point if it is higher in the current year compared to the previous one, 0 otherwise)

The score is calculated based on the data from the financial statement of a company. A company gets 1 point for each met criteria. Summing up all achieved points gives Piotroski F-score (a number between 0 and 9). Simply speaking, a company with a score of 8 or 9 is considered good and viable for investments. On the other hand, a company with a score of 0-2 is seen as week.

The attributes are summarized in a table below for better understanding:

Formula:

F Score = ROA+ CFO + ∆ROA + ACCRUAL + ∆LEVERAGE + ∆LIQUIDITY + ∆EQUITY + ∆MARGIN + ∆TURNOVER

The Piotroski F-Score is not intended to be used on its own. Rather this is an additional filter for a value screen. The starting point is taking the companies which fall into the bottom 20% of the market. This is in terms of their price to book/NAV value.

His paper also states that the “benefits to financial statement analysis are concentrated in small and medium-sized firms, companies with low share turnover, and firms with no analyst following”. The reason for this is presumed to be the information gap – there is less likely to be genuine mispricing for large companies that have a lot of analysts.