What is the Piotroski F Score?

//What is the Piotroski F Score?
What is the Piotroski F Score? 2017-10-09T05:31:33+00:00

Definition: Piotroski F Score is a stock valuation method used rate a company based on nine factors found on the financial statements. These factors are split into three main categories: profitability, liquidity, and efficiency.

What Does Piotroski F Score Mean?

What is the definition of Piotroski f score? This metric uses a binary rating to assign one point for each of the following nine financial statement questions that can be affirmed.

  1. Is return on assets positive?
  2. Is operating cash flow positive?
  3. Did return on assets increase from last year?
  4. Is the cash flow from operations more than return on assets for the year?
  5. Is the long-term debt ratio lower than last year?
  6. Did the current ratio increase from last year?
  7. Did the company not issue new shares?
  8. Did the gross margin increase from last year?
  9. Did the asset turnover ratio increase from last year?

Investors ask these questions about a company they are analyzing and assign one point for each yes answer. Thus, if the answer is “yes” to all nine of these questions, the company’s stock rating will be a 9/9. If only five answers are “yes,” the stock rating is 5/9. Obviously, the closer to nine a company’s rating is, the more valuable and investable the stock is.

Let’s take a look at an example.

Example

Todd wants to invest in companies that are worth more than what reflected in papers. He creates a list of companies that he thinks have a low price to book value. Todd then runs a test of these 9 questions with their publicly available financial data.

With each favorable answer, Todd assigns the companies one point. Each company with a score of 5 or more has a high likelihood of growth in the future and Todd should consider investing in. Companies with a score of less than five might be good companies, but they aren’t likely to grow according to Piotroski. Thus, Todd should stay away from these companies.

Summary Definition

Define Piotroski F Score: F-score means a rating system that helps investors identify strong companies by analyzing their financial statements using 9 binary questions related to the firm’s profitability, funding and operational efficiency.