Piotroski F-Score

The Piotroski F-Score is a financial model developed by Joseph Piotroski in 2000 as a way to evaluate the financial health and performance of a company. The model uses nine financial ratios and accounting metrics to assign a score ranging from 0 to 9 to a company, with higher scores indicating better financial health.

The Piotroski F-Score evaluates a company's financial statements and assigns points for positive or negative trends in the following areas:

  1. Profitability: Is the company generating profits from its operations?
  2. Leverage: Is the company taking on too much debt?
  3. Liquidity: Does the company have enough current assets to cover its short-term liabilities?
  4. Efficiency: Is the company using its assets efficiently to generate sales?
  5. Cash flow: Is the company generating positive cash flow from its operations?
  6. Operating efficiency: Is the company generating profits from its operations?
  7. Asset quality: Is the company investing in profitable assets?
  8. Operating efficiency: Is the company generating profits from its operations?
  9. Earnings quality: Are the company's earnings sustainable?

Each financial metric is given a point if it meets certain criteria, such as positive trends in earnings or asset turnover. The points are then added up to give a final score, which can range from 0 to 9.

A score of 0-2 indicates poor financial health, a score of 3-4 suggests that the company is average, and a score of 5-9 suggests that the company is financially healthy.

The Piotroski F-Score is used by investors and analysts as a tool for evaluating the financial health and performance of a company, and it can be a useful way to identify potential investment opportunities.

Example:

Company ABC has following financial data for a company:

  • Return on assets (ROA) = 0.05
  • Cash flow from operations = $10 million
  • Net income = $8 million
  • Long-term debt to total assets ratio = 0.3
  • Current ratio = 2.5
  • Gross margin = 0.4
  • Asset turnover ratio = 0.9
  • Change in return on assets (ROA) = 0.03
  • Change in long-term debt to total assets ratio = -0.05

Using these data, we can calculate the financial ratios used in the Piotroski F-Score:

  1. ROA > 0: 1 point
  2. Cash flow from operations > 0: 1 point
  3. Change in ROA > 0: 1 point
  4. Accruals (net income - cash flow from operations) > 0: 0 points
  5. Long-term debt to total assets ratio < previous year: 1 point
  6. Current ratio > previous year: 1 point
  7. Gross margin > previous year: 1 point
  8. Asset turnover ratio > previous year: 1 point
  9. Change in gross margin > 0: 1 point

Using these points, we can calculate the Piotroski F-Score for the company:

Piotroski F-Score = 1+1+1+0+1+1+1+1+1 Piotroski F-Score = 8

The Piotroski F-Score for this hypothetical company is 8, which suggests that the company is financially healthy and has strong financial performance.