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Understanding Piotroski F-Score



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Our earlier lesson dealt on Understanding Altman Z-Score of companies which helps us understand the solvency of a company.

In this lesson, we will go ahead to our next rule.

Rule #33: Prefer companies with Piotroski F-Score above 6

Piotroski F-Score is an easy to use single number that gives an overall financial score to a company.

The computation related to Piotroski F-Score was developed by Joseph Piotroski, an Accounting Professor at the University of Chicago.

All stocks are rated from 0 to 9 with 0 being the worse and 9 being the best.

There are nine parameters based on which the scoring is done.

These nine parameters are grouped under three heads:

Profitability

1. Positive net income compared to last year

2. Positive operating cash flow in the current year

3. Higher return on assets (ROA) in the current period compared to the ROA in the previous year

4. Cash flow from operations greater than Net Income

Balance sheet health in terms of debt and the number of shares outstanding

5. Lower ratio of long term debt to in the current period compared value in the previous year

6. Higher current ratio this year compared to the previous year

7. No new shares were issued in the last year

Operating efficiency

8. A higher gross margin compared to the previous year

9. A higher asset turnover ratio compared to the previous year

How to find Piotroski F-Score

Actually there are very few resources that take into account the computation related to Piotroski F-Score.

ValueResearchOnline.com is one such website that provides the details.

Visit the website and sign up for free. Then do a search for your company and on the company page.

On the right part of the page, you will be able to locate Piotroski F-Score.

For example, the [Piotroski F-Score for Infosys is 4.

Advantages

The biggest advantage of the computation is that it takes the most recent financial data and by this we can come to know if the financial performance is recent or a long lasting one.

So, a low score does not necessarily mean that the company has bad financial.

It can also mean that it is not performing well at the moment.

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