Piotroski Score

AAA

DEFINITION of 'Piotroski Score'

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 (below) 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 (1 point).
  • Positive operating cash flow in the current year (1 point).
  • Higher return on assets (ROA) in the current period compared to the ROA in the previous year (1 point).
  • Cash flow from operations are greater than ROA (1 point)

Leverage, Liquidity and Source of Funds

  • Lower ratio of long term debt to in the current period compared value in the previous year (1 point).
  • Higher current ratio this year compared to the previous year (1 point).
  • No new shares were issued in the last year (1 point).

Operating Efficiency

  • A higher gross margin compared to the previous year (1 point).
  • A higher asset turnover ratio compared to the previous year (1 point).

INVESTOPEDIA 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.

RELATED TERMS
  1. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets. ...
  2. Long-Term Debt

    Loans and financial obligations lasting over one year. Long-term ...
  3. Operating Cash Flow - OCF

    In accounting, a measure of the amount of cash generated by a ...
  4. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  5. Value Investing

    The strategy of selecting stocks that trade for less than their ...
  6. Current Ratio

    A liquidity ratio that measures a company's ability to pay short-term ...
Related Articles
  1. Active Trading

    Warren Buffett: How He Does It

    We look at the Sage of Omaha's methodology for evaluating value stocks.
  2. Options & Futures

    Finding Undiscovered Stocks

    Wall Street tends to focus on large cap stocks, leaving other stocks under-followed and undervalued.
  3. Investing Basics

    Getting To Know Stock Screeners

    Finding good stocks can be like finding a needle in a haystack. But these invaluable tools can help.
  4. Active Trading

    The Value Investor's Handbook

    Learn the technique that Buffett, Lynch and other pros used to make their fortunes.
  5. Markets

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  6. Mutual Funds & ETFs

    Value Traps: Bargain Hunters Beware!

    Find out how to avoid getting sucked in by a deceiving bargain stock.
  7. Fundamental Analysis

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  8. Stock Analysis

    What’s The Best Airline Stock In the Industry?

    With many airlines forced to seek bankruptcy protection, Southwest Airlines stands out as having consistently remained profitable throughout its history.
  9. Investing Basics

    What is Profit?

    Profit is a general term used to denote when earnings exceed the expenses incurred to generate those earnings.
  10. Stock Analysis

    Is 3D Systems Sell-Off A Buying Opportunity?

    It's not easy to find stocks that have sold off in the past year, but 3D Systems's shares have taken a nosedive in the beginning of 2014.

You May Also Like

Hot Definitions
  1. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  2. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  3. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  4. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  5. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center