What is the Piotroski Score? Why Do Investors Use it to Evaluate a Company’s Finances?
Would-be investors must conduct thorough research into the companies they plan to invest in. Such research can be extremely exhaustive and tedious. However, a metric called the Piotroski score is relatively simple to arrive at but can still be a powerful indicator of a company’s financial health. By providing an indication of the financial health of companies, the Piotroski score can also help investors pick high-value stocks and manage risks.
This Piotroski score was devised by an accounting professor at the University of Chicago named Joseph Piotroski, and the first score was published in 2000.
Read on as we discuss the meaning of Piotroski score, how to calculate it, its advantages and limitations among other key pointers in this blog.
What is the Piotroski Score?
The Piotroski score, also known as the Piotroski F-score, is a discrete score that ranges from 0 to 9 and reflects nine criteria that are used to gauge the strength of a firm’s financial position. Information on these nine criteria can be found in a company’s financial statements.
A Piotroski score of 9 is the best, while 0 is the worst.
How to Calculate the Piotroski Score
The Piotroski score classifies companies into three categories:
- Weak candidates that score in the range 0-2,
- Grey zone candidates that score in the range 3-7, and
- Strong candidates that score in the range of 8-9.
As mentioned above, nine criteria are considered when calculating the Piotroski score. These nine criteria are broken up into three groups:
- profitability,
- leverage, liquidity, funding source, and
- operational efficiency.
For every criterion that a company meets, it is assigned one point. The sum of all the points obtained for the nine criteria gives us that company’s Piotroski score (with a value between 0 and 9).
For reference, here are the Piotroski scores of some Indian stocks as of June 2022:
| Company name | Piotroski score |
| GNFC | 9 |
| ABB India | 9 |
| Hindustan Zinc | 9 |
| Century Plyboards | 8 |
| Rain Industries | 8 |
Also Read: What Are Multibagger Stocks And Why Do People Invest in Them?
Criteria on Which the Piotroski Score is Based
As discussed above, a business entity receives one point for each criterion it meets, and receives zero points for criteria it doesn’t meet. The final step is to add the points so as to identify the stocks with a high Piotroski score. The criteria that companies are evaluated against are given below, grouped under the three categories ‘Profitability’, ‘Leverage, Liquidity, and Funding Source’, and ‘Operational Efficiency’.
1. Profitability
| METRIC | INDICATOR OF | SCORING SCHEME |
| Net income | Ability of a company to make profits | Positive – 1Otherwise – 0 |
| Return on assets in the current year | How well the company’s assets could earn profits | Positive – 1Otherwise – 0 |
| Operating cash flow in the current year | Ability of the company to generate operating cash flow | Positive – 1Otherwise – 0 |
| Cash flow from operations vs net income | The company’s earnings based on its profits and excluding non-cash items | If cash flow from operations is more than net income – 1Otherwise – 0 |
2. Leverage, Liquidity, and Funding Source
| METRIC | INDICATOR OF | SCORING SCHEME |
| Long-term debt | Leverage | Less than in the previous year – 1Otherwise – 0 |
| Current ratio | The company’s ability to pay off short-term liabilities | More than in the previous year – 1Otherwise – 0 |
| Share issue | Company’s ability to grow without diluting equity | No fresh issue in the previous year – 1Otherwise – 0 |
3. Operational Efficiency
| METRIC | INDICATOR OF | SCORING SCHEME |
| Gross margin | Operating margin of the company | More than in the previous year – 1Otherwise – 0 |
| Asset turnover ratio | Efficient usage of company’s assets | More than in the previous year – 1Otherwise – 0 |
The Piotroski score is based on recent performance and identifies current outperformers in terms of profitability and financial health. As a result, companies that have performed well in the past may get a higher score than more consistent performers. A company’s financial position may not necessarily be weak if it scores low. However, it does indicate that its recent performance has been lacklustre.
Advantages of the Piotroski Score
A high Piotroski score helps investors understand a company’s financial health and identify high-value stocks. The Piotroski score evaluates recent company performance and compares the current year’s metrics to those of the previous year on a relative basis.
As a result, it can help pinpoint companies that have begun performing well in the recent past, which might point to the beginning of a trend that investors can take advantage of.
Limitations of the Piotroski Score
As discussed above, the Piotroski score only compares a company’s performance in a given year to its performance in the year before that. Therefore, this score becomes difficult to use in cyclical sectors or during unusual periods like the Covid-19 pandemic in 2020. This is a problem because even a high-quality stock can get a low score in such situations.
Things to Know About the Piotroski score
Given the discussion above, it should be clear that investors must determine the Piotroski score of companies over multiple years to pick stocks that consistently outperform. It is also a good idea to assess the Piotroski score for companies that trade at a relatively low valuation since they have a higher potential to scale up.
In other words, companies that might be undervalued but are considered to be financially sound, according to the Piotroski score, may represent good investment opportunities.
Also Read: What are FAANG Stocks and How Can You Invest in Them?
Final Word
The Piotroski score tells investors about the financial soundness of a company. However, using this score alone may not be the right way to make investment decisions. Many companies had low Piotroski scores during the pandemic, but they managed to catch up quite quickly once the worst of the pandemic was over.
Conversely, a high Piotroski score might simply result from an unusually good period for a company. It might not indicate the company’s ability to provide consistent returns. Thus, one must be financially aware while investing in stocks using the Piotroski score and consider the company’s performance over multiple years among other factors.
FAQs
Ans. The Piotroski score is a score that uses the financial data of companies to evaluate their financial health. Companies are scored on the basis of nine criteria, and the final score ranges from 0 to 9.
Ans. Companies that score an 8 or 9 are considered to be strong investment candidates, while those that score in the range 0-2 are considered to be weak candidates.
Ans. The Piotroski score is a great way for you to analyse the financial health of companies in order to make investment decisions. However, it is advised that you look at the financial statements of the companies over multiple years instead of looking only at this score, which reflects only recent data.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
