Joseph Piotroski, an accounting professor, developed a nine point scoring system - the Piotroski F-Score - to increase the returns of a strategy of buying low price to book value companies.
Buying only those companies that scored highest (8 or 9) on his nine-point scale, over the 20 year period from 1976 to 1996 led to an average market out-performance 13.4%.
How is the Piotroski or F-Score calculated?
Profitability
1. Return on assets (ROA)
Net income before extraordinary items for the year divided by total assets at the beginning of the year.
Score 1 if positive, 0 if negative
2. Cash flow return on assets (CFROA)
Net cash flow from operating activities (operating cash flow) divided by total assets at the beginning of the year.
Score 1 if positive, 0 if negative
3. Change in return on assets
Compare this year’s return on assets (1) to last year’s return on assets.
Score 1 if it’s higher, 0 if it’s lower
4. Quality of earnings (accrual)
Compare Cash flow return on assets (2) to return on assets (1)
Score 1 if CFROA>ROA, 0 if CFROA<ROA
Funding
5. Change in gearing or leverage
Compare this year’s gearing (long-term debt divided by average total assets) to last year’s gearing.
Score 1 if gearing is lower, 0 if it’s higher.
6. Change in working capital (liquidity)
Compare this year’s current ratio (current assets divided by current liabilities) to last year’s current ratio.
Score 1 if this year’s current ratio is higher, 0 if it’s lower
7. Change in shares in issue
Compare the number of shares in issue this year, to the number in issue last year.
Score 1 if there is the same number of shares in issue this year, or fewer. Score 0 if there are more shares in issue.
Efficiency
8. Change in gross margin
Compare this year’s gross margin (gross profit divided by sales) to last year’s.
Score 1 if this year’s gross margin is higher, 0 if it’s lower
9. Change in asset turnover
Compare this year’s asset turnover (total sales divided by total assets at the beginning of the year) to last year’s asset turnover ratio.
Score 1 if this year’s asset turnover ratio is higher, 0 if it’s lower
Evaluation
Piotroski or F-Score = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9
Good or high score = 8 or 9 = Good F-Score
Bad or low score = 0 or 1 = Bad F-Score
How to use the ratio
Available as a screening ratio: Yes
Available as an output column ratio: Yes (Look under the Quality heading)
How to select the highest F-Score companies
To find companies with the highest or best Piotroski F-Score set the slider from 0% to 10%.
Read more about the Piotroski F-Score investment strategy
You can read more about the Piotroski F-Score investment strategy here: Piotroski strategy back test
Are there any F-Score values missing
Also take a look at the indicator F score missing values. It shows you how many of the 9 Piotroski F-Score values could not be calculated.
For example, if the Piotroski F-Score = 6 and the F score missing values = 3 it means 3 of the 9 Piotroski F-Score components could not be calculated because the data was not available.
If a component of the Piotroski F-Score cannot be calculated a 0 value is entered for that component.
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Use the Piotroski F-Score to seriously improve your returns
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