Piotroski Score

The Piotroski Score is a nine-point checklist that evaluates a company’s financial strength using items from its financial statements. Developed by Joseph Piotroski, it helps investors identify potentially attractive value stocks by assigning one point for each favorable accounting signal. Scores range from 0 to 9; higher scores indicate stronger financial health.

Key takeaways

• Score range: 0–9; one point per satisfied criterion.
• Useful as a value-stock filter—especially for low price-to-book (P/B) companies.
• Best used alongside other analysis; it is backward-looking and can be affected by accounting choices.
• Historically, portfolios of high-scoring stocks have shown outperformance in some studies.

The nine Piotroski criteria

The nine binary tests are grouped into profitability, leverage/liquidity/funding, and operating efficiency. For each test, award 1 point if the condition is met.

Profitability
* Positive net income (Net income > 0).
* Positive return on assets (ROA > 0).
* Positive operating cash flow (CFO > 0).
* Operating cash flow greater than net income (CFO > Net income) — indicates quality of earnings.

Leverage, liquidity and funding
* Decreased leverage (long-term debt/total assets lower than prior year).
* Increased current ratio (current assets/current liabilities higher than prior year).
* No new shares issued in the last year (no dilution).

Operating efficiency
* Higher gross margin than prior year.
* Higher asset turnover than prior year (sales/total assets).

How to calculate

1. Obtain the current-year and prior-year financial statements.
2. Compute each metric (ROA = Net income / Total assets; asset turnover = Sales / Total assets; gross margin = (Sales − COGS) / Sales; current ratio = Current assets / Current liabilities).
3. Compare current year to prior year where required, and assign 1 point for each favorable result.
4. Sum the points to get the Piotroski Score (0–9).

Piotroski recommended starting with companies in the lowest P/B quintile and then using the score to pick stronger candidates.

Example (condensed)

For hypothetical company XYZ:
* Profitability: Net income > 0 (1), ROA > 0 (1), CFO > 0 (1), CFO > Net income (1) → 4 points.
* Leverage/liquidity/funding: Long-term debt decreased (1), current ratio fell (0), no new shares issued (1) → 2 points.
* Efficiency: Gross margin fell (0), asset turnover fell (0) → 0 points.

Total = 6/9 → moderate/average value candidate.

Interpreting scores

• 8–9: Strong financial health; attractive among value stocks.
• 3–7: Mixed signals; requires further analysis.
• 0–2: Weak financial health; higher risk.

Strengths and limitations

Strengths
* Simple, transparent, and inexpensive to implement.
* Combines multiple accounting indicators to reduce reliance on any single metric.
* Particularly useful as a second-level screen for low P/B stocks.

Limitations
* Backward-looking—reflects past accounting results, not future prospects.
* Can be distorted by one-time items, accounting changes, or aggressive reporting.
* Industry effects: some sectors (e.g., financials, utilities) may require adjusted interpretation.
* Not a substitute for qualitative analysis (business model, management, competitive position) or macro/market context.

Practical tips

• Use the Piotroski Score as part of a broader investment process, not as the sole decision rule.
• Combine with valuation screens (P/B, P/E), qualitative research, and risk management.
• Recalculate annually or whenever new financials are released.
• Watch for accounting red flags that may inflate scores (one‑time gains, unusual cash flows).

Final thought

The Piotroski Score is a compact, disciplined way to assess financial quality among value candidates. It highlights companies that show improving fundamentals on several fronts, but it should be paired with broader analysis to form reliable investment decisions.

Reference: Joseph D. Piotroski, “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” Journal of Accounting Research (2000).