The Piotroski F-score is a fundamentals-based quality score developed by a University of Chicago professor Joseph Piotroski. Essentially, the Piotroski score is a number between 0 and 9 that reflects nine selection criteria used to determine the quality of the company. The selection criteria are divided into three areas: profitability, capital structure, and operating efficiency.
Profitability (4 points total)
• Positive Net Income (1 point)
• Positive return on assets in the current year (1 point)
• Positive operating cash flow in the current year (1 point)
• Cash flow from operations being greater than net Income (quality of earnings) (1 point)
Capital Structure (3 points total)
• Lower ratio of long-term debt in the current period, compared to the previous year (decreased leverage) (1 point)
• Higher current ratio this year compared to the previous year (more liquidity) (1 point)
• No new shares were issued in the last year (lack of dilution) (1 point).
Operating Efficiency (2 points total)
• A higher gross margin compared to the previous year (1 point)
• A higher asset turnover ratio compared to the previous year (1 point)
The points are then added together. The tables below present the Piotroski scores for the last three years, the combined score of those years (Total Score), and the trailing twelve months score (TTM). By combining the score of the latest three years (Total Score), there is a better chance to find companies that have a consistent track of superior performance. TTM can help you find companies that have done well over the most recent 12 months.
Note that while the score is helpful in determining the strength of a firm’s financial position, it says nothing about the price at which it is selling. Regardless of the quality and financial strength of the company, paying too much can reduce your long-term returns. So, while you may be tempted to pick and invest in companies with the highest score, make sure to do due diligence and investigate whether the stock price is reasonable. For example, you can do valuation work using the DCF Model Template on this website. Overall, the Piotroski F-score is a helpful value investing tool to find quality stocks that deserve your attention.
