Piotroski Score
Categories: Metrics, Financial Theory
The Piotroski score is a 10-point scale (0 through 9)...a talent-show-like scorecard for a firm and its financial stability.
A firm will get a point for each of the following profitability measures: positive net income, positive return on assets, positive operating cash flow, and higher cash flow from operations than net income.
To prove a firm’s strength and flexibility, a firm can get a point for: lower ratio of long-term debt compared to last year, higher current ratio compared to last year’s, and no new shares issued. A firm that does well in this area is in control of itself, and is improving. A newer, better, you, firm-you.
The last area the Piotroski score judges firms on is their operating efficiency. Firms get one point for an improved gross margin compared to last year’s, and a higher asset turnover ratio compared to last year’s. A firm with points in this area over the years is sure to be a lean, mean, green-making machine.
Investors can use the Piotroski score as a way to find the best value stocks; the higher the score, the better. Accounting prof Joseph Piotroski came up with this scale. He just wanted an easy-ish, yet well-rounded and thorough way to measure companies’ stock values against each other. It’s only speculation, but we think he was watching ice skating when he came up with this thing.
