Piotroski’s F-score

Piotroski’s F-score Method for Evaluating Value Stocks

Joseph Piotroski is a professor of accounting at the University of Chicago Graduate School of Business. In 2000, he published a paper detailing a method which he developed for analyzing the inherently riskier value stocks on the market. In this paper, he also discusses the result of an extensive study of 14,043 companies tracked over a 20 year test period between 1976 and 1996 to show the efficacy of his method.


Piotroski’s F-score method provides investors with an elegantly simple yet thorough equation for calculating the strength of a company based entirely on information available in its financial records. It examines nine components across three different areas which Piotroski identifies as the most important indicators of a company’s financial strength.

In order to simplify the process, he uses a binary scoring system meaning each component is assigned a score of 1 if it meets Piotroski’s criteria or 0 if it does not. The scores of all nine components are then added together to provide the F-score which will land somewhere between 0 and 9.

The idea is that the higher a company’s F-score, the more likely the stock will be to bring a return to investors. Stocks with F-scores of 8 or 9 then, would be expected to bring about the highest returns on investments. But before we look at whether or not this holds up in reality, let’s take a closer look at the components Piotroski uses in his evaluations.

The 9 components:

The three financial areas evaluated to determine a company’s F-score are profitability, financial leverage and liquidity, and operating efficiency. It is thought that together, these three areas provide a rounded picture of a company’s financial strength and ability to persist through or recover from economic hardships. Each of the nine components specifically analyzed fall within one of these three areas.


  1. ROA: A company’s ROA (or, Return On Assets) represents its net income before extraordinary expenditures. In order to receive a score of 1, the company needs to have a positive ROA.
  2. CFO: This is the cash flow from operations and indicates the income a company earns from its business activities (such as producing and selling products or providing services). Because it excludes money the company has from investments or long-term capital, this figure is a good indicator of the real productivity of the business. A company’s CFO must be positive in order to receive a 1 in Piotroski’s method.
  3. Change in ROA: In addition to a company’s current ROA, Piotroski looks at its change in ROA over time in order to see whether or not the company is struggling and on the way out. To calculate this, take the company’s ROA from the previous year and subtract it from its current ROA (current ROA – previous ROA = change in ROA). If the number is positive, the stock receives a score of 1 for this component.
  4. Accrual: This component is determined by simply comparing a company’s current return on assets (ROA) with its current cash flow from operations (CFO). In order to receive a 1 for this component, the CFO must be greater than the ROA.

Financial Leverage and Liquidity:

  1. Change in Leverage: This is one of the figures which can signal a company’s ability to meet its debt obligations. This is important because many companies may be showing profitability at the moment but if they are unable to meet their obligations in the long-run. To calculate a company’s change in leverage, simply check to see that the debt to equity ratio is lower this year than it was in the previous year. If so, the stock receives a 1.
  2. Change in Liquidity: This is another indicator of a company’s strength and ability to finance its debt. The liquidity should be increasing year over year. When this is the case, give the stock a score of 1 for this component.
  3. EQ Offer: If a company has offered common equity, it could signal that it is unable to generate enough funds from regular business operations in order to accommodate its debt. Thus, in order to receive a score of 1 according to Piotroski’s method, the company should not have offered any common equity in the past year.

Operating Efficiency:

  1. Change in Gross Margin Ratio: A company’s margins represent its profitability relative to its costs. If its gross margin ratio is increasing year over year this indicates that it is able to keep costs down in order to maximize profits and should receive a 1 here.
  2. Change in Turnover: Turnover is calculated by taking the company’s sales and dividing it by its assets as they were at the beginning of the year. A high turnover indicates a company’s ability to generate income. To calculate change, subtract the company’s previous year turnover from its current turnover (Current Turnover – Previous Turnover = Change in Turnover). If this number is positive, the stock receives a score of 1.

Efficacy of the F-score method:

In Piotroski’s paper, the results of his method are definitely impressive. It bears mentioning that its success when applied to past cases does not necessarily mean that it will continue to be as successful in the future. However, the consistency of positive results seen in the test sample show that it is very promising and likely to be a useful method for investors with value stock portfolios. That said, let’s take a closer look at how useful a stock’s F-score was in determining its success:

Included in the sample set of 14,043 companies are stocks with F-scores spanning the whole range from 0 to 9. Most stocks had a score landing between 3 and 7. However, the 1,448 stocks with an F-score of 8 or 9 invariably saw consistent returns on investment. On the other end of the spectrum, the 396 stocks with scores of 0 or 1  consistently saw poor returns and were five times more likely to have gone bankrupt or to have been delisted due to financial problems.

This means that at the extreme ends of the spectrum, Piotroski’s method definitely holds up. Furthermore, the difference in rates of return on high F-score stocks and those with low F-scores are substantial. Those receiving a score of 8 or 9 outperformed their weaker counterparts by an average of 15.2%. Value stock portfolios containing exclusively high-scoring stocks (with scores of 8 or 9) saw average annual returns 7.5% higher than the returns on value stock portfolios containing a mixture of both high and low scoring stocks. The better performance of high-scoring stock portfolios was consistent over the course of the 20 year test period.



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