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The Piotroski score refers to a discrete score between 0-9 reflecting nine criteria that are used to determine the strength of a financial position firm. The use of the Piotroski score is to determine the best value stocks, with zero being the worst and nine the best.
A Little More on What is a Piotroski Score
The term Piostroski score got the name from Chicago Accounting Professor Joseph Piotroski, who came up with the scale, as per the specific company financial statements’ aspects. Aspects have much to do with the recent period’s results of the company accounting. One point is given for every criterion met. However, when there is none met, then there is no awarding of points. These points are then put together to determine the best stocks.
The Piotroski score is usually broken down into profitability; leverage, liquidity, source of funds; and operating efficiency categories, as highlighted below:
Criteria for Profitability
- Positive Net Income – one point
- Operating cash flow that is positive in the current year – one point
- Operations cash flow that is more than the net income – one point
- Return on assets that is positive in the current year – one point
Criteria for Liquidity, Leverage, and Source of Funds
- Long term debt’s lower ratio in the current period, compared to the past year (one point)
- Lack of dilution (No new shares were issued in the past year) (one point)
- Higher current ratio the current year compared to the last year (one point)
Criteria for Operating Efficiency
- A higher asset turnover ratio than that in the previous year gets one point
- A higher gross margin than that of last year gets one point as well
When a company’s score happens to hit 8 or 9, then it is considered to be a good value. On the other hand, when the score point is between 0-2, it means that that the stock is considered weak. However, according to any investment system, the past results are not an indication that in the future, things will be work is a similar manner.