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;
- Operating Efficiency
- 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.
- 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.
- 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.
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:
- 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
- Net Income > 0
- Operating Cash Flow > 0
- Return On Assets (present) > Return On Assets (previous)
- Operating Cash Flow > Net Income
- Long-Term Debt (present) > Long-Term Debt (previous)
- Current Ratio (present) > Current Ratio (previous)
- Shares Outstanding (present) >= Shares Outstanding (previous)
- 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.
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.