Piotroski score

The Piotroski score is designed to identify high-quality firms by looking at nine separate criteria.

The Piotroski score is designed to identify high-quality firms - ie, those that are growing profits without resorting to accounting tricks, increasing balance-sheet risk or sacrificing margins for higher volume.

It's a fairly simple screen looking at nine separate criteria. If the firm passes each test it earns a one, otherwise it scores a zero; these individual marks are added to give a total Piotroski score between one and nine. Stocks with a score of five or more are considered to be reasonably strong and studies suggest that value stocks with a high score tend to outperform.

The nine criteria are:

1. The company needs to show positive net income in other words, it has to make money.

2. Same goes for operating cash flow.

3. There's an extra mark if operating cash flow is greater than net income, ie, the profits are producing hard cash.

4. Profitability should be improving, too. If a company's return on assets is better than the previous year, it scores a point.

5. A point is also scored for a rising gross profit margin.

6. Then the balance sheet comes under the microscope. The ratio of total debt divided by total assets has to drop.

7. Working capital meanwhile, should be growing. Working capital is defined as the difference between current assets, such as stock and debtors, and current liabilities such as creditors. More working capital generally means a business is growing.

8. A point is scored for signs of rising productivity, where a company's sales rise compared with its assets.

9. Finally, Piotroski likes to see the number of shares in issue drop, or at least remain the same. Doling out new stock to raise cash could mean a management is being lazy and it also dilutes existing shareholders' profits.

Recommended

Margin call
Glossary

Margin call

When an investor borrows to bet on markets, they put down a deposit known as “margin”.
2 Apr 2021
Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
Lab-grown meat: how “moo’s law” will drive innovation
Soft commodities

Lab-grown meat: how “moo’s law” will drive innovation

Jim Mellon and Anthony Chow, co-founders of Aim-listed Agronomics, explain why they believe that “cellular agriculture” will benefit from massive long…
16 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021