Lets know more about the Piotroski score!

Piotroski score is a metric score that helps to determine the financial strength of a company. It was developed by Stanford accounting professor Joseph Piotroski. The score, which ranges between 0 to 9, enables investors to pick good value stocks. The metric takes into account various parameters, and upon fulfilment of every parameter, the company gets awarded 1 point.  

The following parameters are assessed while ascertaining the Piotroski score:  

A) Profitability  

B) Leverage, liquidity and source of funds   

C) Operating efficiency  

How is this score calculated?  

The above-mentioned groups are further subdivided into the following parts. 

A) Profitability-  

• Return on Assets (if positive, 1 point is awarded, otherwise no point awarded)  

• Operating Cash Flow (if positive, 1 point is awarded, otherwise no point awarded)  

• Change in Return of Assets (ROA) (if ROA in current year > ROA in the previous year, 1 point is awarded, otherwise no point awarded)  

• Accruals (if Operating Cash Flow/Total Assets > ROA in the current year, 1 point is awarded, otherwise, no point awarded)  

B) Leverage, liquidity and source of funds  

• Change in Leverage (long-term) ratio (if this ratio in current year < ratio in the previous year, 1 point is awarded)  

• Change in Current ratio (If the current ratio in current year > ratio in the previous year, 1 point is awarded)  

• Change in the number of shares (if no new shares were issued during the last year, 1 point is awarded)  

C) Operating efficiency  

• Change in Gross Margin (if margins in the current year > margins in the previous year, 1 point is awarded)  

• Change in Asset Turnover ratio (if the ratio in current year > ratio in the previous year, 1 point is awarded)  
   

In the end, all the points are summed up to determine the final score. A score of 0 denotes weak financials while 9 indicates strong financials.