The Piotroski F-Score is a simple, 9-point scoring system that rates companies based on basic accounting information.
It was originally described in a white paper by Stanford accounting professor Joseph Piotroski as the result of an examination of "whether a simple accounting-based fundamental analysis strategy, when applied to a broad portfolio of high book-to-market firms, can shift the distribution of returns earned by an investor."
He identified 9 factors that led to a 7.5% outperformance in his backtesting period, and 23% average annual returns when used in a long/short portfolio. We have also recently backtested the Piotroski F-Score and have continued to observe outperformance.
As Piotroski limited his universe to high book-to-market firms (or low price-to-book ones), his strategy is particularly effective for these types of stocks.
The higher the score the better. The score ranges can be interpreted as follows: 1-4 is a bad score. 5-6 is acceptable. 7-9 is great. The Piotroski score will not work for every industry like financials or Capital Expenditure-heavy industries where debt is required to keep the business operating. Remember, the focus of the research was on high book-to-market firms (low P/B), so performance of this model improves when combined with such firms.