Piotroski Score

What Is the Piotroski Score?

The Piotroski score is a discrete score somewhere in the range of zero and nine that reflects nine criteria used to determine the strength of a company's financial position. The Piotroski score is utilized to determine the best value stocks, with nine being the best and zero being awful.

The Piotroski score was named after Chicago Accounting Professor Joseph Piotroski, who conceived the scale, as per specific parts of company financial statements. Viewpoints are centered around the company's accounting brings about recent time spans (years). For each criterion met (noted below), one point is granted; in any case, no points are granted. The points are then amounted to determine the best value stocks.

Understanding the Piotroski Score

The Piotroski score is broken down into the accompanying categories:

1. Profitability
2. Leverage, liquidity, and source of funds
3. Operating effectiveness

Profitability Criteria Include:

• Positive net income (1 point)
• Positive return on assets (ROA) in the current year (1 point)
• Positive operating cash flow in the current year (1 point)
• Cash flow from operations being more noteworthy than net Income (quality of earnings) (1 point)

Leverage, Liquidity, and Source of Funds Criteria Include:

• Lower amount of long term debt in the current period, compared to the previous year (diminished leverage) (1 point)
• Higher current ratio this year compared to the previous year (greater liquidity) (1 point)
• No new shares were issued in the last year (lack of dilution) (1 point).

Operating Efficiency Criteria Include:

• A higher gross margin compared to the previous year (1 point)
• A higher asset turnover ratio compared to the previous year (1 point)

Perusing the Score

On the off chance that a company has a score of 8 or 9, it is viewed as a decent value. On the off chance that the score amounts to between 0-2 points, the stock is viewed as weak. Piotroski's April 2000 paper "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers," exhibited that the Piotroski score method would have seen a 23% annual return somewhere in the range of 1976 and 1996 assuming that the expected champs were bought and expected washouts shorted. As a starting point, Piotroski suggested investors start with a sample of the bottom 20% of the market in terms of price-to-book value.

Of course, with any investment system, seeing past outcomes doesn't mean it will work the same way from here on out. Those keen on learning more about the Piotroski Score and other financial topics might need to consider signing up for one of the most incredible investing courses currently accessible.

Scoring With the Piotrosky Method

To act as an illustration of the Piotrosky scoring method in real life, note the accompanying criteria calculations for Foot Locker, Inc. (FL) for fiscal year 2020. The profitability calculation was as per the following:

• Net income ($323,000,000) (Score:1 point)
• ROA (4.7%) (Score: 1 point)
• Net operating cash flow ($696,000,000) (Score: 1 point)
• Cash flow from operations ($696,000,000) > net income ($323,000,000) (Score: 1 point)

The leverage calculation was as per the following:

• Long-term debt ($110,000,000) versus earlier extended's term debt ($120,000,000) (Score: 1 point)
• Current ratio (1.7) versus earlier year's current ratio (2.0) (Score: 0 points)
• No new shares issued in 2020 (Score: 1 point)

The effectiveness calculation was as per the following:

• Gross margin (28.9%) versus earlier year's gross margin (31.8%) (Score: 0 points)
• Asset turnover ratio (1.11) versus earlier year's (1.54) (Score: 0 points)

Foot Locker's total Piotrosky score in 2016 was a 6 out of 9, which could make it an average value proposition going into 2022, as per the Piotrosky method.

Features

• The nine perspectives depend on accounting results over a number of years; a point is granted each time a standard is met, bringing about an overall score.
• On the off chance that a company has a score of eight or nine, it is viewed as a decent value. In the event that a company has a score of somewhere in the range of zero and two points, it is reasonable not a decent value.
• It was named for Joseph Piotroski, a Chicago Accounting Professor who made the scale, in view of certain parts of a corporation's financial statements.
• The Piotroski score is a positioning somewhere in the range of zero and nine that consolidates nine factors that address a company's financial strength.
• The Piotroski score is a most loved measurement used to judge value stocks.