Piotroski F-Score: A Quick Way to Find Great Value Stocks

Shailesh Kumar, MBA
Nov 5, 2019 · 3 min read

According to the Joseph Piotroski’s 2002 paper, high book to market stocks filtered for high Piotroski f-score (buy), and low Piotroski f-scores (short sell) increases the annual returns on average by 7.5% over a market basket of high book to market stocks.

A high book to market portfolio outperforms a broad market index over time. According to this paper, filtering for Piotroski f-score adds incremental and non-significant amount of alpha to the portfolio returns.

We all want that, don’t we?

So, What is the Piotroski F-Score and How do we Use it?

The method proposed by Joseph Piotroski recommends to evaluate the company’s financial statements on 9 different attributes. Either the company passes or fails each of the 9 evaluations. Every pass is awarded 1 point. A fail is awarded no points. All the points are added up to give a final Piotroski f-score between 0 and 9.

Scores of 8 and 9 are considered strong value stocks. Scores of 2 or below are considered weak value stocks.

The 9 criteria is as follows, listed under 3 different groups:

Profitablity

1. Positive Net Income in the current year = 1 point. Company is profitable.

2. Positive Operating Cash Flow in the current year = 1 point. Company is generating cash.

3. Positive change in ROA (Current year vs previous year) = 1 point. Company is improving its profitability.

4. Accruals: Operating Cash Flow > Net Income = 1 point. This is to ensure that the net income is not being driven by a change in accruals.

Leverage, Liquidity and Source of Funds

5. Decrease in Long Term Debt in the current year compared to previous year = 1 point. Leverage is going down.

6. Increase in Current Ratio this year compared to previous year = 1 point. Liquidity is getting better.

7. Current Outstanding Shares <= Previous Year Outstanding Shares = 1 point. There is no share dilution

Operating Efficiency

8. Gross Margin, current year > Gross Margin, previous year = 1 point. Company is getting better at improving profitability

9. Asset Turnover Ratio, current year > Asset turnover ratio, previous year = 1 point. The company is able to generate more revenue from its asset base.

Piotroski F-Score is therefore a quick way to judge a company’s financial strength. Please note that a company with a high Piotroski f-score does not necessarily imply a good value stock. The Piotroski f-score filter needs to be applied in conjunction with other valuation filters. Professor Piotroski himself used this on high book to market stocks (or said differently, low P/B ratio stocks).

It is very possible to find stocks exhibiting high Piotroski f-score and a high valuation. These stocks represent quality, but not value. Therefore, you do need to conduct appropriate fundamental analysis of the stock as you check the f-score.

Screening for Piotroski F-Score

Many professional screeners have filters for Piotrosky f-score built in. For example, I use the Stock Rover screener and it allows me to screen for Piotroski f-score. However, if the screener you use does not offer this filter, you could select the relevant data from the financial statements and create filters in Excel yourself. You will need the following for current year and the previous year

From the Balance Sheet:

  • Number of shares outstanding
  • Total assets (to calculate asset turnover ratio and ROA)
  • Long term debt
  • Current Assets and Current Liabilities (to calculate the current ratio)

From the Income Statement:

  • Sales
  • Net Income
  • Gross Margin %

From the Cash Flow Statement:

  • Operating Cash Flow

Your goal is to find stocks that are undervalued by your other valuation criteria, and that exhibit a high Piotroski f-score of 8 or 9.

Tip: At Value Stock Guide we publish screens for high Piotroski F-Score.

Like this article? Read More at Value Stock Guide’s Edition on Google News

More articles for you to read:


Originally published at https://valuestockguide.com on November 5, 2019.

Shailesh Kumar, MBA

Written by

Value Investor and Entrepreneur. Curious about the world. Founder of ValueStockGuide.com

Value Stock Guide

Looking for values in the global stock markets.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade