How To Use The Piotroski F-Score To Find Good Stocks | The Investing Engineer PH

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How To Use The Piotroski F-Score To Find Good Stocks

In January 2002, a smart guy named Joseph D. Piotroski published a paper entitled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” In that paper, he described a simple accounting-based fundamental analysis strategy that will later be called the “Piotroski F-Score.“In this post, I’ll briefly discuss the financial metrics used and how it can help you make better investment decisions.So to start, let’s define what is it about and give you an example on how to apply it.

What Is The Piotroski F-Score?

The Piotroski F-Score is a 9-point scoring system that determines the strength of a company’s financial position. The higher the score, the better a company’s financial health.The Piotroski F-Score 9-point scoring system is divided into three groups;

  • Profitability
  • Leverage
  • Operating Efficiency

PROFITABILITY

  • Score 1 point if there is a positive income in the current year.
  • Score 1 point if there is a positive operating cash flow in the current year.
  • Score 1 point if the current return on assets is higher compared to the previous year.
  • Score 1 point if cash flow from operations is greater than net income.

LEVERAGE

  • Score 1 point if there is a lower ratio of long term debt to in the current period compared value in the previous year.
  • Score 1 point if there is a higher current ratio this year compared to the previous year.
  • Score 1 point if no new shares were issued in the previous year.

OPERATING EFFICIENCY

  • Score 1 point if there is a higher gross margin compared to the previous year.
  • Score 1 point if there is a higher asset turnover ratio year compared to the previous year.
Scoring a 7 or higher is a sign that the company is in a sound financial condition whereas a score of 3 or lower is considered a company in distress.Just remember that this shouldn’t to be used as a standalone metric for valuation but rather as an additional filter when screening stocks.

How To Use The Piotroski F-Score Test

The first thing you need to do is to gather all the needed financial figures listed below:

  • Revenue
  • Gross Profit
  • Net Income
  • Current Assets
  • Current Liabilities
  • Total Assets
  • Cash From Operating Activities
  • Long-Term Debt
  • Shares Outstanding

From the data above, you need to calculate the following figures below:

  • Long-Term Debt/Total Assets
  • Return On Assets; Net Income / Total Assets
  • Current Ratio; Current Assets / Current Liabilities
  • Gross Profit Margin; Gross Profit / Revenue
  • Asset Turnover Ratio; Revenue / Total Assets

TIP # 1

Morningstar provides all the needed data above. You can use this tool if you want to get easy access on the financial statements and key ratios.
After you get the needed figures compare them year-on-year by using the following criteria below
If the condition is true, assign that metric a score of 1, If false, assign 0.Profitability

  • Net Income > 0
  • Operating Cash Flow > 0
  • Return On Assets (present) > Return On Assets (previous)
  • Operating Cash Flow > Net Income

Leverage

  • Long-Term Debt (present) > Long-Term Debt (previous)
  • Current Ratio (present) > Current Ratio (previous)
  • Shares Outstanding (present) >= Shares Outstanding (previous)

Operating Efficiency

  • Gross Profit Margin (present) > Gross Profit Margin (previous)
  • Asset Turnover (present)> Asset Turnover (previous)

Now, 7 to 9 points can be considered great companies while 5 to 6 points are considered average. Avoid companies with scores of 4 and below.

Final Thoughts

The Piotroski F-Score is one of the quality metrics I use in my Value Investing scorecard.Using the Piotroski F-Score can help you single out companies based on profitability, leverage, and operating efficiency. This tool is great if you’re looking an additional screener to use in your investing strategy.To make it much easier for you, I’ve made a Piotroski F-Score spreadsheet which you can use in your valuations. Download it FREE below.

Download Piotroski F-Score Spreadsheet

Happy investing!

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  • Tim says:

    Good post Mark.

    I did a lot of testing with the Piotroski F-Score and it can really help your returns.

    For example, we tested the Piotroski F-Score with 13 other ratios and indicators to see if it could not have increased your returns.

    What we found was remarkable.

    As, with the exception of two other ratios (ROIC and Net Debt on Market Value), combining the F-Score with another ratio would have given you a lot higher returns.

    The strategy combined with the best Piotroski F-Score companies that gave the best returns over the 12 year period was FCF Yield which returned just over 680%.

    You can read the whole article here: http://www.quant-investing.com/blogs/general/2015/03/12/can-the-piotroski-f-score-also-improve-your-investment-strategy

    I developed a screener to invest my own money that does all the calculations for you.

    We unfortunately do not have Philippine companies in the screener but the following Asian countries are included:
    China
    Japan
    South Korea
    Hong Kong
    Singapore
    Malaysia
    Here is the full list of countries covered: http://www.quant-investing.com/screener/countries

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