Piotroski F score
Engineered by Stanford University accounting professor Joseph Piotroski, the F-score is a scoring methodology that evaluates the financial strength of a company using a set of nine criteria. For each company a score is accumulated by added a point for each criterion is met. The higher the score of the company the stronger its financial position.
The criteria grouped in terms of profitability, leverage and liquidity and operational efficiency. More specifically:
Profitability:
- Return on Assets (1 point if it is positive in the current year)
- Operating Cash Flow (1 point if it is positive in the current year)
- Change in Return of Assets (ROA) (1 point if ROA is higher in the current year compared to the previous one)
- Accruals (1 point if Operating Cash Flow/Total Assets is higher than ROA in the current year)
Leverage, Liquidity and Source of Funds
- Change in Leverage (long-term) ratio (1 point if the ratio is lower this year compared to the previous one)
- Change in Current ratio (1 point if it is higher in the current year compared to the previous one)
- Change in the number of shares (1 point if no new shares were issued during the last year)
Operating Efficiency
- Change in Gross Margin (1 point if it is higher in the current year compared to the previous one)
- Change in Asset Turnover ratio (1 point if it is higher in the current year compared to the previous one)
Piotroski, Joseph D. January 2002, The University of Chicago Graduate School of Business.
Does it still work?
A recent study (2017) on 125,000 companies by Harry J. Turtle and Kainan Wang show that portfolios of firms with strong fundamental underpinnings generate significant positive and time-varying performance.
Harry J. Turtle, Kainan Wang, Journal of Financial Research, Forthcoming (Jan 2017)