A discrete score between 0-9 which reflects nine criteria used to determine the strength of a firm's financial position. The Piotroski score is used to determine the best value stocks, nine being the best. The score was named after Chicago Accounting Professor, Joseph Piotroski who devised the scale according to specific criteria found in the financial statements. For every criteria that is met the company is given one point, if it is not met, then no points are awarded. The points are then added up to determine the best value stocks.
Profitability
Positive return on assets in the current year .
Positive operating cash flow in the current year .
Higher return on assets in the current period compared to the ROA in the previous year .
Cash flow from operations are greater than ROA
Leverage, Liquidity and Source of Funds
Lower ratio of long term debt to in the current period compared value in the previous year .
Higher current ratio this year compared to the previous year .
No new shares were issued in the last year .
Operating Efficiency
A higher gross margin compared to the previous year .
A higher asset turnover ratio compared to the previous year .
Taobiz explains Piotroski Score
If a company has a score of 8 or 9 it is considered strong. If the score adds up to between 0-2 points, the stock is considered weak. Piotroski's April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted. With any investment system, looking at past results doesn't always means it will work in the future, but having an investment plan and rules is never a bad idea.
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