The Piotroski F-Score
A proven 9-point system to separate financial winners from losers. Discover how this simple checklist can significantly boost your portfolio returns.
What is the Piotroski F-Score?
The Piotroski F-Score is a number between 0 and 9 that is used to assess the strength of a company's financial position. It was developed by Stanford accounting professor Joseph Piotroski in 2000.
In his famous paper, "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers," Piotroski demonstrated that by applying simple accounting-based fundamental filters, investors could significantly outperform the market.
The strategy is particularly effective when applied to value stocks (companies with high Book-to-Market ratios). By filtering out the financially weak companies, the F-Score helps investors avoid "value traps"—stocks that look cheap but are actually deteriorating.
The 9-Point Formula Breakdown
The F-Score is calculated by summing up one point for each of the following criteria met. The higher the score, the stronger the company.
1. Profitability
Focuses on the company's ability to generate funds internally.
- Positive Net Income: Is the company profitable this year?
- Positive Operating Cash Flow: Is cash from operations positive?
- Higher ROA: Is Return on Assets higher this year than last year?
- Quality of Earnings: Is Operating Cash Flow greater than Net Income?
2. Leverage & Liquidity
Measures changes in capital structure and ability to meet debt obligations.
- Lower Long-Term Debt: Is long-term debt to assets ratio lower than last year?
- Higher Current Ratio: Is the current ratio higher this year than last year?
- No Dilution: Did the company avoid issuing new shares this year?
3. Operating Efficiency
Looks for improvements in the efficiency of the company's operations.
- Higher Gross Margin: Is gross margin higher this year than last year?
- Higher Asset Turnover: Is the asset turnover ratio higher this year than last year?
Interpreting the Score
The total score ranges from 0 to 9. Here is how to interpret the results:
- 7-9 Strong: The company has very healthy fundamentals and is likely a solid investment.
- 4-6 Average: The company is stable but not exceptional. Further research is required.
- 0-3 Weak: The financial condition is deteriorating. These stocks are risky and potential value traps.
Backtesting data from various financial sources, including Investopedia and AAII, consistently shows that buying high F-Score stocks and shorting low F-Score stocks yields significant alpha over time.
At Old School Value, we calculate the Piotroski F-Score automatically for over 50,000 stocks, saving you the time of digging through 20 years of financial statements manually.
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Combine the F-Score with these other powerful screening tools for better results.
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