Piotroski F-Score is a 9-point scoring system developed by accounting professor Joseph Piotroski to assess the financial strength of value stocks. Published in his 2000 paper "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers," the score identifies which cheap stocks are actually improving financially.
The 9 Criteria
Profitability (4 points)
- Net income is positive (1 point)
- Operating cash flow is positive (1 point)
- Return on assets increased year-over-year (1 point)
- Cash flow from operations exceeds net income (1 point)
Leverage & Liquidity (3 points) 5. Long-term debt ratio decreased (1 point) 6. Current ratio improved (1 point) 7. No new shares issued (1 point)
Operating Efficiency (2 points) 8. Gross margin improved (1 point) 9. Asset turnover improved (1 point)
Interpretation
- Score 8-9: Strong fundamentals. These companies are improving across nearly every financial dimension.
- Score 5-7: Mixed signals. Some areas improving, others declining.
- Score 0-4: Weak fundamentals. The company is deteriorating financially.
Why It Works
The F-Score is particularly powerful when applied to low price-to-book stocks. Piotroski's research showed that high F-Score value stocks outperformed low F-Score value stocks by 7.5% annually. The score separates value traps (cheap stocks that are cheap for a reason) from genuine bargains.