What is the Piotroski score?
The Piotroski score is a discreet score between 0 and 9 which reflects nine criteria used to determine the solidity of a company’s financial situation. The Piotroski score is used to determine the best value stocks, nine being the best and zero being the worst. The Piotroski score was named after Chicago accounting professor Joseph Piotroski, who designed the scale, based on specific aspects of the company’s financial statements. The aspects focus on the accounting results of the business over the last periods (years). For each criterion satisfied (noted below), one point is awarded; otherwise, no points are awarded. The points are then added together to determine the best value actions.
Key points to remember
- The Piotroski score is a discreet score between 0 and 9 which reflects nine criteria used to determine the solidity of a company’s financial situation.
- The Piotroski score is a preferred measure used to judge actions of value.
- If a business has a score of 8 or 9, it is considered good value. If the score totals between 0 and 2 points, the stock is considered to be low.
Understanding Piotroski’s score
The Piotroski score breaks down into profitability; leverage, liquidity and source of funding; and operational efficiency categories, as follows:
- Positive net income (1 point)
- Positive return on assets for the current year (1 point)
- Positive operating cash flow for the current year (1 point)
- Operating cash flow higher than net income (quality of results) (1 point)
Leverage, liquidity and source of funding Criteria:
- Lower long-term debt ratio during the period considered, compared to the previous year (reduction in debt) (1 point)
- Higher current ratio this year compared to the previous year (more liquidity) (1 point)
- No new shares were issued last year (lack of dilution) (1 point).
Operational efficiency criteria:
- Gross margin higher than the previous year (1 point)
- A higher asset turnover rate than the previous year (1 point)
If a business has a score of 8 or 9, it is considered good value. If the score totals between 0 and 2 points, the stock is considered to be low. Piotroski’s April 2000 article “Investing in Value: Using Historical Information on the Financial Statements to Separate Winners from Losers” demonstrated that Piotroski’s scoring method reported annual returns of 23% between 1976 and 1996 if the expected winners had been bought and the expected losers short-circuited. . As a starting point, Piotroski suggested investors start with a sample of the lowest 20% in the market in terms of book value.
Of course, with any investment system, looking at past results does not mean that it will work the same way in the future.
Scoring with the Piotrosky method
As an example of the Piotrosky scoring method in action, note the following criteria calculations for Foot Locker (FL) in 2020:
- 2020 net income ($ 664,000,000) (Note: 1 point)
- ROA 2020 (17%) (Score: 1 point)
- 2020 net operating cash flow ($ 816,000,000) (note: 1 point)
- 2020 operating cash flow ($ 816,000,000)> Net income ($ 664,000,000) (Note: 1 point)
- 2020 long-term debt ($ 127,000,000) compared to 2020 long-term debt ($ 129,000,000) (note: 1 point)
- Current ratio 2020 (4.30) compared to current ratio 2020 (3.72) (Score: 1 point)
- No new shares issued in 2020 (score: 1 point)
- 2020 gross margin (33.94%) compared to 2020 gross margin (33.08%) (score: 1 point)
- 2020 asset turnover ratio (2.04) compared to 2020 (2.02) (score: 1 point)
Foot Locker’s total score on Piotrosky in 2020 was 9, which makes it an excellent value proposition until January 2020, according to the Piotrosky method.