Piotroski F-score

Last updated

Piotroski F-score is a number between 0 and 9 which is used to assess strength of company's financial position. The score is used by financial investors in order to find the best value stocks (nine being the best). The score is named after Stanford accounting professor Joseph Piotroski. [1]

Contents

Calculation procedure

The score is calculated based on 9 criteria divided into 3 groups. [2]

Profitability
  1. Return on Assets (ROA) (1 point if it is positive in the current year, 0 otherwise);
  2. Operating Cash Flow (1 point if it is positive in the current year, 0 otherwise);
  3. Change in Return of Assets (ROA) (1 point if ROA is higher in the current year compared to the previous one, 0 otherwise);
  4. Accruals (1 point if Operating Cash Flow/Total Assets is higher than ROA in the current year, 0 otherwise);
Leverage, Liquidity and Source of Funds
  1. Change in Leverage (long-term) ratio (1 point if the ratio is lower this year compared to the previous one, 0 otherwise);
  2. Change in Current ratio (1 point if it is higher in the current year compared to the previous one, 0 otherwise);
  3. Change in the number of shares (1 point if no new shares were issued during the last year);
    Operating Efficiency
  1. Change in Gross Margin (1 point if it is higher in the current year compared to the previous one, 0 otherwise);
  2. Change in Asset Turnover ratio (1 point if it is higher in the current year compared to the previous one, 0 otherwise);

Some adjustments that were done in calculation of the required financial ratios are discussed in the original paper. [2]

The score is calculated based on the data from financial statement of a company. A company gets 1 point for each met criterion. Summing up of all achieved points gives Piotroski F-score (number between 0 and 9).

Interpretation

The highest possible Piotroski score is 9 and the lowest is 0. Higher the score better the value of the company's stock. F-score of 8–9 is considered to be strong. Alternatively, firms achieving the F-score of 0–2 are considered to be weak.

Average value of Piotroski F-score can be different in different branches of economy (e.g. manufacturing, finance, etc.). This should be taken into consideration when comparing companies with different specializations.

Limits

The Piotroski F-score is a method invented or thought up a few decades ago. Since realities are no longer what they were when it was conceived, it can happen that this strategy, although effective, suffers from some shortcomings. First, it is a strategy that only compares a company's results in one year to those of the previous year. This makes it difficult to apply in cyclical sectors or during particular periods such as during health crises that affect the profitability of all sectors (e.g. the Covid-19 pandemic in 2020).

Other notes

See also

Related Research Articles

Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements ; health; competitors and markets. It also considers the overall state of the economy and factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management. There are two basic approaches that can be used: bottom up analysis and top down analysis. These terms are used to distinguish such analysis from other types of investment analysis, such as quantitative and technical.

The net present value (NPV) or net present worth (NPW) is a way of measuring the value of an asset that has cashflow by adding up the present value of all the future cash flows that asset will generate. The present value of a cash flow depends on the interval of time between now and the cash flow because of the Time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications.

Stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will overall rise in value, while overvalued stocks will generally decrease in value. A target price is a price at which an analyst believes a stock to be fairly valued relative to its projected and historical earnings.

Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors and shareholders. Enterprise value is one of the fundamental metrics used in business valuation, financial analysis, accounting, portfolio analysis, and risk analysis.

<span class="mw-page-title-main">Value investing</span> Investment paradigm

Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. Modern value investing derives from the investment philosophy taught by Benjamin Graham and David Dodd at Columbia Business School starting in 1928 and subsequently developed in their 1934 text Security Analysis.

<span class="mw-page-title-main">DuPont analysis</span> Expression which breaks ROE (return on equity) into three parts

DuPont analysis is a tool used in financial analysis, where return on equity (ROE) is separated into its component parts.

In finance, leverage, also known as gearing, is any technique involving borrowing funds to buy an investment.

The return on equity (ROE) is a measure of the profitability of a business in relation to its equity; where:

In finance, margin is the collateral that a holder of a financial instrument has to deposit with a counterparty to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following:

Capitalization rate is a real estate valuation measure used to compare different real estate investments. Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value. Most variations depend on the definition of the annual rental income and whether it is gross or net of annual costs, and whether the annual rental income is the actual amount received, or the potential rental income that could be received if the asset was optimally rented.

In economics, valuation using multiples, or "relative valuation", is a process that consists of:

<span class="mw-page-title-main">Financial statement analysis</span>

Financial statement analysis is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. These statements include the income statement, balance sheet, statement of cash flows, notes to accounts and a statement of changes in equity. Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, valuation, financial health, and future prospects of an organization.

<span class="mw-page-title-main">Altman Z-score</span> Model for assessing likelihood of bankruptcy

The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to determine the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.

In asset pricing and portfolio management the Fama–French three-factor model is a statistical model designed in 1992 by Eugene Fama and Kenneth French to describe stock returns. Fama and French were colleagues at the University of Chicago Booth School of Business, where Fama still works. In 2013, Fama shared the Nobel Memorial Prize in Economic Sciences for his empirical analysis of asset prices. The three factors are (1) market excess return, (2) the outperformance of small versus big companies, and (3) the outperformance of high book/market versus low book/market companies. There is academic debate about the last two factors.

According to PIMS, an important lever of business success is growth. Among 37 variables, growth is mentioned as one of the most important variables for success: market share, market growth, marketing expense to sales ratio or a strong market position.

Joseph D. Piotroski is the Robert K. Jaedicke Professor of Accounting at Stanford University's Graduate School of Business, and a senior fellow at the Asian Bureau of Finance and Economic Research (ABFER). Prior to joining Stanford in 2007, Piotroski was at the University of Chicago Booth School of Business (1999–2007).

The price-to-book ratio, or P/B ratio, is a financial ratio used to compare a company's current market value to its book value. The calculation can be performed in two ways, but the result should be the same. In the first way, the company's market capitalization can be divided by the company's total book value from its balance sheet. The second way, using per-share values, is to divide the company's current share price by the book value per share. It is also known as the market-to-book ratio and the price-to-equity ratio, and its inverse is called the book-to-market ratio.

A financial ratio or accounting ratio states the relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are publicly listed, the market price of the shares is used in certain financial ratios.

Cash return on capital invested (CROCI) is an advanced measure of corporate profitability, originally developed by Deutsche Bank's equity research department in 1996. This measure compares a post-tax, pre-interest cash flow to the gross level of capital invested and is a useful measure of a company’s ability to generate cash returns on its investments.

The Beneish model is a statistical model that uses financial ratios calculated with accounting data of a specific company in order to check if it is likely that the reported earnings of the company have been manipulated.

References

  1. ↑ Stockopedia. "The Piotroski F-Score: Reviewing Joseph Piotroski's accounting-based value investing screen". Business Insider. Retrieved 2022-03-08.
  2. 1 2 Piotroski, Joseph D. (January 2002). "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers" (PDF). The University of Chicago Graduate School of Business.
  3. ↑ "Value Investing Research: Simple Methods to Improve the Piotroski F-Score". Alpha Architect. 2015-05-05. Retrieved 2017-01-19.
  4. ↑ Investors, American Association of Individual. "AAII: The American Association of Individual Investors" . www.aaii.com. Retrieved 2017-01-19.

[1]

  1. ↑ Conseil Boursier Gratuit - Le Piotroski F-Score : Outil D’un Investisseur Intelligent En Bourse
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.