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The Piotroski Score – Defined

The Piotroski Score otherwise called the Piotroski F-Score was devised by Joseph Piotroski, an Accounting Professor from the USA. The Piotroski Score is a score between zero and nine that employs nine different financial parameters to find out the financial strength of a company. A score of 0 means, the financial position of the company is bad. and a score of 9 means the financial position of the company is very good. Various aspects of the finances of the Company in recent years are considered and given one point if the criterion is satisfied or else given a zero if the criterion is not met.

The Piotroski Score considers the following criteria from the financial statement of the Company :

  • Profitability
  • Leverage, liquidity, and source of funds
  • Operating efficiency

Profitability criteria include:

  • Positive net income – 1 point
  • Positive Return on Assets in the current year –  1 point
  • Positive operating cash flow in the current year – 1 point
  • Cash flow from operations being greater than Net Income (quality of earnings) – 1 point

Leverage, liquidity, and source of funds criteria include:

  • Lower ratio of long term debt in the current period, compared to the previous year (decreased leverage) -1 point
  • Higher current ratio this year compared to the previous year (more liquidity)-  ( 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

Limitations of Piotroski Score 

  • The Piotroski Score is based on past results and that does not guarantee that the same phenomenal results will continue in the future also.
  • The Piostroski Score serves as a good tool to consider the financial position of the Company. But it has to be supplemented with other studies of value investing to understand the wholesome scenario of the Company.  For instance, decreasing Promotor holding. Thus Piostroski Score is not all-inclusive in Value Investing.
  • For different sectors of the economy, the Piotroski Score may be different. For instance, in Infrastructure Sector where the cash flow from operations could be less due to pending receivables whereas in the FMCG Sector, the cash flow could be more due to the inherent nature of the industry. This factor has to be taken into account when Piotoski Score is deployed in our study.

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