What Is the Piotroski Score?
The Piotroski Score is a discrete score between zero and nine that 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, with nine being the best and zero being the worst.
The Piotroski Score was named after Chicago Accounting Professor Joseph Piotroski, who devised the scale, according to specific aspects of company financial statements. Aspects are focused on the company’s accounting results in recent time periods (years). For every criterion met (noted below), one point is awarded; otherwise, no points are awarded. The points are then added up to determine the best value stocks.
- The Piotroski Score is a ranking between zero and nine that incorporates nine factors that speak to a firm's financial strength.
- It was named for Joseph Piotroski, a Chicago Accounting Professor who created the scale, based on certain aspects of a corporation's financial statements.
- The nine aspects are based on accounting results over a number of years; a point is awarded each time a standard is met, resulting in an overall score.
- The Piotroski Score is a favorite metric used to judge value stocks.
- If a company has a score of eight or nine, it is considered a good value. If a company has a score of between zero and two points, it is not a good value.
Understanding the Piotroski Score
The Piotroski Score is broken down into the following categories:
- 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) (1 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)
If a company has a score of 8 or 9, it is considered a good value. 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. As a starting point, Piotroski suggested investors begin with a sample of the bottom 20% of the market in terms of price-to-book value.
Of course, with any investment system, looking at past results doesn't mean 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 2016. The profitability calculation was as follows:
- 2016 net income ($664,000,000) (Score:1 point)
- 2016 ROA (17%) (Score: 1 point)
- 2016 net operating cash flow ($816,000,000) (Score: 1 point)
- 2016 cash flow from operations ($816,000,000) > net income ($664,000,000) (Score: 1 point)
The leverage calculation was as follows:
- 2016 long-term debt ($127,000,000) versus 2015 long-term debt ($129,000,000) (Score: 1 point)
- 2016 current ratio (4.30) versus 2015 current ratio (3.72) (Score: 1 point)
- No new shares issued in 2016 (Score: 1 point)
The efficiency calculation was as follows:
- 2016 gross margin (33.94%) versus 2015 gross margin (33.08%) (Score: 1 point)
- 2016 asset turnover ratio (2.04) versus 2015 (2.02) (Score: 1 point)
Foot Locker's total Piotrosky Score in 2016 was a full nine, which made it an excellent value proposition going into January 2017, according to the Piotrosky method.