F Score Analysis

F Score

The Piotroski F-Score, also known as the "Piotroski Financial Score" or "Piotroski Score", is a quantitative valuation metric used to determine a company's financial strength. The method takes its name from its developer, Stanford professor Joseph Piotroski. Investors use the Piotroski F-Score to make an investment decision based on clearly defined criteria or to monitor existing investments.

The Piotroski score is a 0-to-9 scale that consists of nine elements that relate to a company's financial strength.
nine characteristics are based on accounting outcomes over a number of years; each time a standard is reached, a point is assigned, resulting in an overall score.
A Organisation with a score of eight or nine is considered a good value, while a company with a score of zero to two points is most likely not a suitable value.

Profitability

ROA: Return on assets. Net Income divided by year beginning total assets. F score is 1 if ROA is positive, 0 otherwise.

CFO: Operating cash flow divided by year beginning total assets. F score is 1 if CFO is positive, 0 otherwise.

∆ROA: Change in ROA from the prior year. If ∆ROA > 0, F score is 1. Otherwise, F score is 0.

ACCRUAL: CFO compared to ROA. If CFO > ROA, F score is 1. Otherwise, F score is 0.

Leverage, Liquidity, and Source of Funds

∆LEVER: Change in long-term debt/average total assets ratio. If the ratio compared to the prior year is lower, F score is 1, 0 otherwise.

∆LIQUID: Change in current ratio. If the current ratio increases from the prior year, F score is 1, 0 otherwise.

EQ_OFFER: Total common equity between years. If common equity increases compared to prior year, F score is 1, 0 otherwise.

Operating Efficiency

∆MARGIN: Change in gross margin ratio. If the current year’s ratio minus prior year’s ratio > 0, F Score is 1, 0 otherwise.

∆TURN: Change in asset turnover ratio (revenue/beginning year total assets). If current year’s ratio minus prior years > 0, F score is 1, 0 otherwise.

Example of F Score

Company Name XYZ

(in millions) Current Year Last Year

Revenue 232,887 177,866

Cost of Goods Sold 127,056 103,134

Gross Margin 105,831 74,732

Net Income 10,073 3,033

Year End Current Assets 75,101 60,197

Year End Current Liabilities 68,391 57,883

Year Beginning Total Assets 131,310 83,402

Year End Total Assets 162,648 131,310

Long-term Debt 39,787 37,926

Operating Cash Flow 30,723 18,434

Diluted Shares Outstanding 43,549 27,709

Calculation Equations

Profitability

ROA =Net Income ÷ Opening Asset

2.CFO = Operating Cash flow ÷ Opening Assets

3. ∆ROA (Change >0 ) =(Net Income ÷ Opening Asset)-( last year Net income ÷ Opening Assets)

4. ACCRUAL CFO>ROA

Leverage, Liquidity, Source of Funds

5. ∆LEVER ={(L.term debt ÷ (Open Asset+Clos Asset)/2) < (last year L.term debt ÷ (Open asset+ Clos Asset)/2)}

6. ∆LIQUID {Clos. Current asset ÷ Clos Current Liabilities)> last year. Clos. Current asset ÷ Clos Current Liabilities)}

7.EQ_OFFER Share issued 1 otherwise 0

Operating Efficiency

8.∆MARGIN (gross margin ÷ Sales) > ( Last year's gross margin ÷ Sales)

9. ∆TURN ( Sales ÷ opening Asset ) > ( last year sales ÷ Open Assets )

Score Breakdown

Profitability

ROA 1

CFO 1

∆ROA 1

ACCRUAL 1

Leverage, Liquidity, Source of Funds

∆LEVER 1

∆LIQUID 1

EQ_OFFER 0

Operating Efficiency

∆MARGIN 1

∆TURN 0

Total Score 7

i.e. the firm with a strong value.

Decision Criteria

F score is a ranking between zero and nine that incorporates nine factors that speak to a firm's financial strength.
9 aspects are based on accounting results over a number of years; a point is awarded each time a standard is met, resulting in an overall score.
If a company has a score of 7 to 9, it is considered a good value. If the score adds up to between 1-3 points, the stock is considered weak. A score of 4 to 6 is considered a stable company.

Further Notes of Calculations

Components Score

Profitability

ROA

=10073 ÷ 131310= 0.077 1

CFO

= 30723 ÷131310= 0.234 1

∆ROA

=(10073÷ 131310) - (3033 ÷83402)

= 0.077 > 0.037 1

ACCRUAL

=(30723÷131310) > (10073 ÷ 131310)