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What Is The Piotroski F-Score?
The Piotroski F-Score is a financial indicator designed by accounting professor Joseph Piotroski which puts together nine criteria to evaluate the financial strength of a business based on its profitability, leverage, liquidity, source of funds, and operating efficiency.
Based on his study, a firm with a Piotroski score of 8-9 is in a strong financial position while companies with a score lower than 3 are financially weak.
In his 2000s paper, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, he shows how the score can improve returns when applied to a simple value investing strategy, such as buying low P/B ratio stocks. As the author suggests, value investing is a great strategy but stocks are sometimes cheap for a reason — their financial weaknesses. For instance, less than 44% of all low P/B ratio stocks gain a positive market-adjusted return in the two years following portfolio creation. Using its score to pick only financially strong companies among those with a low P/B ratio increased the mean return by 7.5% annually.
Further, he backtested an investing strategy that bought the stocks with the best score and sold those with the worst between 1976 and 1996. The results are amazing–the strategy generated a 23% annual return, beating the market by a large extent.
How To Calculate Piotroski F-Score: Formula Explained
The calculation of the score is very simple—you just have to assign one point to a company for each criterion met. Next, you have to add up all the points to get the Piotroski F Score:
1. Net Income > 0 (+1)
2. ROA > 0 (+1)
3. CFO > 0 (+1)
4. CFO > Net Income (earnings quality) (+1)
Leverage, Liquidity, and Source of Funds Criteria
5. Long Term Debt Current Year < Long Term Debt Previous Year (decreasing leverage) (+1)
6. Current Ratio Current Year > Current Ratio Previous Year (increasing liquidity) (+1)
7. No new shares issued in the last year (shares dilution) (+1)
Operating Efficiency Criteria
8. Gross Margin CY > Gross Margin PY (+1)
9. Asset Turnover Ratio CY > Asset Turnover Ratio PY (+1)
Piotroski F-Score Example Calculation
To illustrate we can use the formula above to calculate Microsoft's (MSFT) Piotroski F-Score.
Using the Finbox data explorer, we can find the values of the metrics required to apply the formula:
- Microsoft's Net Income: $44.281B
- Microsoft's ROA: 15.1%
- Microsoft Cash From Operations: $60.675B
- Microsoft's Long Term Debt CY: $59.578
- Microsoft's Long Term Debt PY: $66.662
- Microsoft's Current Ratio CY: 2.5x
- Microsoft's Current Ratio PY: 2.5x
- Shares Issued In The Last Year: 0
- Gross Margin CY: 38.2%
- Gross Margin PY: 37.8%
- Asset Turnover Ratio CY: 0.9x
- Asset Turnover Ratio PY: 0.7x
We can now calculate Microsoft Piotroski F-Score:
- Net Income > 0 - ✓ (+1)
- ROA > 0 - ✓ (+1)
- CFO > 0 - ✓ (+1)
- CFO > Net Income - ✓ (+1)
- LT Debt CY < LT Debt PY - ✓ (+1)
- Current Ratio CY > Current Ratio PY - X (0)
- Now New Shares Issued In The Last Year - ✓ (+1)
- Gross Margin CY > Gross Margin PY - ✓ (+1)
- Asset Turnover Ratio CY > Asset Turnover Ratio PY (+1)
Microsoft's Piotroski F-Score indicates a high financial strength for the company. That puts Microsoft around the 95th percentile for stocks in the U.S. Information Technology sector.
Piotroski F-Score Calculator
You can calculate the Piotroski F-Score for every single company in the world using this automated template. Using the Finbox Spreadsheet Add-On, you just have to enter the ticker of the company whose score you want to calculate and the model will do everything automatically.
Here's a preview of Finbox's Piotroski F-Score Calculator:
The idea behind the Piotroski F-Score is very simple–using historical financial statement data to separate winners from losers. Since not all cheap stocks are value stocks, the Piotroski Score can help you find the difference between them and improve your investment performance.