What is the Piotroski F-Score

The Piotroski F-Score is a nine-point score created by accounting professor Joseph Piotroski. It serves to assess the financial performance and stability of companies, particularly those with low market valuation. The F-score utilizes three main areas: profitability, leverage, and operating efficiency. Each of these indicators measures specific attributes of a company that may indicate its overall health.

1. Profitability

This part of the F-Score includes three key indicators:

• Earnings Per Share (EPS): If the earnings per share increased compared to the previous year, it scores 1 point.
• Quality of Earnings: If the earnings are positive, but cash flow from operations is also positive, it gives 1 point.
• Return on Assets (ROA): If ROA is positive in the current year, an additional 1 point is awarded.

For example, if AAPL (Apple Inc.) has higher EPS than the previous year and positive cash flow, its F-Score will increase, indicating it is healthier.

2. Leverage

Leverage is assessed using two indicators:

• Decrease in the debt-to-assets ratio: If the debt/assets ratio decreased compared to the previous year, it scores 1 point.
• Reduction in total debt: If total debt decreased, it also scores 1 point.

For instance, if MSFT (Microsoft Corp.) reduced its debt-to-assets ratio while also decreasing total debt, its F-Score will strengthen.

3. Operating Efficiency

Operating efficiency is measured by four indicators:

• Increase in gross margin: If a company's gross margin increased, it scores 1 point.
• Increase in Return on Assets (ROA): If ROA rose, it also gives 1 point.
• Decrease in days sales outstanding (DSO): If the average DSO decreases, it scores 1 point.
• Decrease in inventory turnover days: If inventory turnover days decrease, it also scores 1 point.

For example, if ČEZ increases its gross margin and reduces its DSO, its F-Score will also rise.

Significance and Efficiency of F-Score

Backtests of the Piotroski F-Score have shown that stocks of companies with higher F-Scores tend to outperform those with lower F-Scores. For instance, research indicates that a portfolio of stocks with an F-Score above 7 can yield returns as high as 23% better than the market average.

Case Study: Ford Motor Company (F)

Recent examination of Ford's F-Score revealed that its score improved due to increased revenues, reduced debt load, and enhanced gross margin following restructuring. Such evaluations can indicate to investors improving trends within the company.

How to Use Piotroski F-Score in QMA

On the QMA platform, you can utilize the 5-pillar scores and Smart Money tools to see how stocks perform based on the Piotroski F-Score. You can also filter stocks by various indicators using the screener or monitor recommendations in the qma-picks section. Analyze portfolio health and track which stocks might have strong fundamentals and good outlooks.

Where to Find This in QMA

F-Score and other evaluation tools can be found on the QMA platform in the stock analysis section.

Disclaimer

This article is for educational purposes only and does not constitute investment advice. It is important to conduct your own research and consult experts before making any investment decisions.