The Piotroski score is a financial metric created by Stanford accounting professor Joseph Piotroski to evaluate the fundamental strength of a company. It is a nine-point scoring system that uses financial ratios and accounting data to identify companies with improving financial health.
The Piotroski score uses a combination of three criteria from
the company's financial statements: profitability, financial health, and
operating efficiency. Each of these criteria is evaluated using three financial
ratios or metrics. A company can score 1 or 0 for each of the nine criteria,
with 1 being the best score.
The nine criteria used to calculate the Piotroski score are
as follows:
Positive net income
Positive operating cash flow
Increase in return on assets (ROA) year over year
Increase in cash flow from operations year over year
Decrease in leverage year over year
Increase in current ratio year over year
No dilution of shares outstanding
Increase in gross margin year over year
Increase in asset turnover ratio year over year
Once the criteria have been assigned a value, they are added up to calculate the Piotroski score. A score of 8 or 9 is considered good, while a score of 0 to 2 is considered weak.
The Piotroski score is a useful tool for investors who want to identify companies with strong fundamentals that are likely to perform well in the long term. However, it is important to note that the Piotroski score is just one of many metrics that investors should consider when evaluating a company. It should not be used as the sole basis for investment decisions, but rather as a supplement to other forms of analysis.
Each criterion is assigned one point if it meets a specific
condition, otherwise, no points are awarded. The total score is the sum of the
points earned. A higher score indicates a stronger financial position and
increases the likelihood that the company will be a good investment
opportunity.
Investors can use the Piotroski score to screen potential investments or to evaluate the financial strength of companies in their portfolio. However, it is important to note that the score should not be the only factor considered when making investment decisions, and investors should also perform a thorough analysis of a company's financial statements and other relevant information.
The Piotroski Score helps investors to choose the right stock by providing a quick assessment of a company's financial strength. A high Piotroski score indicates that a company has strong financials and is likely to be a good investment, while a low score suggests that the company's financials may be weak, and the investment may not be a good one. Investors can use the Piotroski score to screen potential investments and identify companies that are financially strong and have a high likelihood of delivering good returns. However, the Piotroski score is just one of many financial metrics that investors should consider when making investment decisions.