What Is the Piotroski Score?

What Is the Piotroski Score?

Let me explain the Piotroski Score directly: it's a tool I use to gauge a company's financial strength and its potential as a value investment. Named after Joseph Piotroski, this score goes from 0 to 9, where a higher number points to better financial health. It relies on nine specific criteria pulled from financial statements to separate solid investments from the shaky ones, giving you key insights as an investor.

When you look at recent accounting data, you can spot value stocks by awarding one point for each criterion met. This straightforward system helps you tell strong performers from weak ones—a higher score means a better value pick.

Key Takeaways

Here's what you need to know: the Piotroski Score, from 0 to 9, lets you evaluate a company's financial strength by checking profitability, leverage, liquidity, and efficiency. Joseph Piotroski created it, using nine financial criteria from company statements to pinpoint value stocks.

In the past, stocks with higher scores have outperformed, but remember to use this as part of a wider strategy. It's especially handy for companies with low price-to-book ratios, helping you zero in on promising values. That said, since it depends on historical data, pair it with market and economic overviews for the full picture.

Understanding the Categories of the Piotroski Score

The score breaks down into three main categories: profitability, leverage, liquidity, and source of funds, plus operating efficiency. I'll walk you through each one.

Key Profitability Indicators

For profitability, you get points for positive net income, positive return on assets (ROA) this year, positive operating cash flow this year, and if cash flow from operations exceeds net income—which signals earnings quality. Each of these earns you one point if met.

Evaluating Leverage, Liquidity, and Funding

In leverage and liquidity, points come from a lower long-term debt this period versus last year (showing decreased leverage), a higher current ratio this year than last (indicating more liquidity), and no new shares issued in the past year (avoiding dilution). Again, one point each.

Analyzing Operating Efficiency

For efficiency, you score if there's a higher gross margin than last year and a higher asset turnover ratio than the previous year. These two criteria round out the nine, each worth a point.

What Do Piotroski Score Numbers Reveal?

A score of 8 or 9 means the company is a solid value bet. On the flip side, 0 to 2 points flags it as weak. Piotroski's 2000 paper showed that from 1976 to 1996, this method could deliver a 23% annual return by going long on high scorers and short on low ones.

He recommended starting with stocks in the bottom 20% by price-to-book value. But keep in mind, past results aren't a promise for the future. If you're diving deeper, consider a solid investing course.

Applying the Piotroski Score: Practical Example

Take hypothetical company XYZ. In profitability: net income at $323 million (1 point), ROA at 4.7% (1 point), operating cash flow at $696 million (1 point), and cash flow beating net income (1 point).

For leverage: long-term debt dropped from $120 million to $110 million (1 point), but current ratio fell from 2.0 to 1.7 (0 points), and no new shares (1 point).

Efficiency: gross margin down from 31.8% to 28.9% (0 points), asset turnover from 1.54 to 1.11 (0 points). Total: 6 out of 9, making it an average value play.

How Reliable Is the Piotroski Score?

It's a reliable tool in financial analysis, straightforward and effective for spotting value stocks by weighing multiple factors of financial health.

What Does a High Piotroski Score Mean?

A high score, like 8 to 9, signals a good investment with strong value. Low scores of 0 to 2 point to poor ones.

Difference Between the Altman Z Score and the Piotroski Score

The Piotroski Score measures financial strength, while the Altman Z Score predicts bankruptcy risk. Both draw from company financials.

Final Thoughts on the Piotroski Score

This score is a strong way to identify value stocks by checking financial health across nine criteria like net income, ROA, cash flow, leverage, liquidity, and efficiency. High scores suggest great opportunities, low ones warn of issues. It's proven historically, but use it as a foundation, blending in broader market views for smart decisions.