Definition: Piotroski F Score is a stock valuation method used rate a company based on nine factors found on the financial statements. These factors are split into three main categories: profitability, liquidity, and efficiency.
What Does Piotroski F Score Mean?
What is the definition of Piotroski f score? This metric uses a binary rating to assign one point for each of the following nine financial statement questions that can be affirmed.
- Is return on assets positive?
- Is operating cash flow positive?
- Did return on assets increase from last year?
- Is the cash flow from operations more than return on assets for the year?
- Is the long-term debt ratio lower than last year?
- Did the current ratio increase from last year?
- Did the company not issue new shares?
- Did the gross margin increase from last year?
- Did the asset turnover ratio increase from last year?
Investors ask these questions about a company they are analyzing and assign one point for each yes answer. Thus, if the answer is “yes” to all nine of these questions, the company’s stock rating will be a 9/9. If only five answers are “yes,” the stock rating is 5/9. Obviously, the closer to nine a company’s rating is, the more valuable and investable the stock is.
Let’s take a look at an example.
Example
Todd wants to invest in companies that are worth more than what reflected in papers. He creates a list of companies that he thinks have a low price to book value. Todd then runs a test of these 9 questions with their publicly available financial data.
With each favorable answer, Todd assigns the companies one point. Each company with a score of 5 or more has a high likelihood of growth in the future and Todd should consider investing in. Companies with a score of less than five might be good companies, but they aren’t likely to grow according to Piotroski. Thus, Todd should stay away from these companies.
Summary Definition
Define Piotroski F Score: F-score means a rating system that helps investors identify strong companies by analyzing their financial statements using 9 binary questions related to the firm’s profitability, funding and operational efficiency.
