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Piotroski F-Score: Investment strategy

How to identify the best value stocks?

Piotroski F-Score: Investment strategy

DEFINITION:

The Piotroski F-Score indicator (in Finnish, Piotroskin F-score sijoitusstrategia) is used to analyse a company's financial strength, and helps investors to determine the best-value stocks. This stock valuation method designed by American accounting professor Joseph Piotroski represents 9-point scoring system where nine is the best and zero is the worst score.

How to calculate:

The indicator is calculated based on the company’s accounting results in recent time periods (recent number of years). Piotroski F-score represents the sum of nine (9) individual criteria or aspects. Assessment is made separately for each criterion first. Every criterion can get either score of 0 or 1. If criterion is met the company is given one point (1), otherwise, there is no point is given (0).

Piotroski F-Score indicator calculation is based on 9 criteria divided into 3 groups (A, B, C):

    A. Profitability Parameters

  1. Positive Net Income in the current period (1 point)
  2. Positive Cash flow from operations in the current period (1 point)
  3. The current year's Return on assets (ROA) is higher when compared to the ROA of the previous year (1 point)
  4. Cash Flow from Operations exceeds Net income before extraordinary items (1 point)

    5. B. Funding Parameters

  5. A lower ratio (or equal) of long-term debt in the current period, compared to the value in the previous period (decreased Gearing or leverage) (1 point)
  6. A higher this year's Current ratio compared to the previous year's current ratio (increase in liquidity) (1 point)
  7. The smaller number (or same) of shares in issue this year compared to the number of shares in issue last year (lack of dilution) (1 point)

    8. C. Operating Efficiency Parameters

  8. A higher this year's Gross Margin compared to the previous year's gross margin (1 point)
  9. A higher this year's asset turnover ratio compared to the last year's asset turnover (1 point)

After all criteria has been calculated, the points are then added up to determine the final result.

RESULT INTERPRETATION:

The final result has to be between 0 and 9. The higher the score, the better a company's financial strength.

  • The best score: 9
  • Strong score: 8
  • Good or high score: 7

    • (7, 8, 9: Indicates very healthy situation of the company)

  • Average score: 4, 5, 6

    • (4, 5, 6: financial situation is typical for a stable company)

  • Bad or low score: 1, 2, 3
  • The worst score: 0

    • (Score lower than 3 indicates financially weak company; poor business operation; better to weed out of the portfolio)

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