Piotroski Score Definition

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Definition Of Piotroski Score:

A discrete score between 0-9 which reflectsnine criteriaused to determine thestrength of a firm's financial position.
The Piotroski score is used to determine the best value stocks,nine being the best. The score was named after Chicago Accounting Professor, Joseph Piotroski who devised the scale according to specific criteria found in the financial statements. For every criteria (below) that is met thecompanyis givenone point, if itis not met,then no pointsare awarded. Thepoints are then added up to determine the best value stocks.Profitability Positivereturnon assetsin the currentyear (1 point). Positive operating cash flowin the currentyear (1 point). Higherreturn on assets (ROA)in the current periodcompared totheROA in the previousyear (1 point). Cash flow from operations are greater than ROA (1 point) Leverage, Liquidity and Source of Funds Lower ratio of long term debt toin the current periodcomparedvalue in the previous year (1 point). Highercurrent ratiothis year compared tothe previous year (1 point). No new shares were issuedin thelast year (1 point). Operating Efficiency A highergross margin compared to the previous year (1 point). A higher asset turnover ratio compared to the previous year (1 point).Ifacompany has a score of 8 or 9 it isconsidered strong. If the score adds up to between0-2 points, the stockis considered weak. Piotroski's April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, demonstrated that the Piotroski score methodwould have seena23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted. With any investment system, looking at past results doesn't always means it will work in the future, but having an investment plan and rules is never a bad idea.

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