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Piotroski F-Score: the nine checks

The F-Score is a count from 0 to 9. Each point is one plain yes or no check on a company's last two annual reports: is it profitable, are its debt and liquidity getting better, is it running more efficiently. PlainTicker shows it on each company page.

01

Where it comes from

The accounting professor Joseph D. Piotroski described the score in 2000, in the paper “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers” (Journal of Accounting Research, vol. 38).

He looked at US companies with a high book-to-market ratio, that is, cheap relative to their accounts, from 1976 to 1996. He asked whether a few simple signals from the financial statements could tell the stronger of those companies from the weaker ones. The difference he found was largest among smaller companies.

02

The nine checks

Each check compares the latest fiscal year with the year before, or looks at the latest year alone. A pass adds one point.

Profitability

  1. Net income is positive

    The rule
    Net income for the latest fiscal year is above zero.
    What it tells you
    The company made money over the year.

  2. Operating cash flow is positive

    The rule
    Cash from operations for the latest fiscal year is above zero.
    What it tells you
    The business brings in cash, not only accounting profit.

  3. Return on assets went up

    The rule
    Net income divided by total assets is higher than the year before.
    What it tells you
    The company earns more from what it owns than it did a year ago.

  4. Cash flow is above net income

    The rule
    Cash from operations is larger than net income.
    What it tells you
    Profit is backed by cash. When reported profit runs ahead of cash, it rests on accounting estimates, which Piotroski read as a warning sign.

Debt and liquidity

  1. Long-term debt went down relative to assets

    The rule
    Long-term debt divided by total assets is lower than the year before.
    What it tells you
    The company leans less on borrowing.

  2. Current ratio went up

    The rule
    Current assets divided by current liabilities is higher than the year before.
    What it tells you
    More room to pay what falls due within a year.

  3. No new shares issued

    The rule
    The number of shares did not grow over the year.
    What it tells you
    Issuing shares can mean the company needed outside money, and it spreads each owner's stake thinner.

Operating efficiency

  1. Gross margin went up

    The rule
    Gross profit divided by revenue is higher than the year before.
    What it tells you
    Better prices or cheaper production.

  2. Asset turnover went up

    The rule
    Revenue divided by total assets is higher than the year before.
    What it tells you
    The same assets bring in more sales.
03

How to read the score

Add up the checks that pass. Piotroski's paper treated 8 or 9 as a high score and 0 or 1 as a low one. PlainTicker names four bands:

8 or 9
Strong fundamentals
6 or 7
Stable quality
4 or 5
Mixed signals
0 to 3
Weak fundamentals

The score describes the last two annual reports. It says nothing about the share price and it is not a forecast.

04

Where it falls short

  • It looks back. It reads annual reports that can already be months old.
  • It was built and tested on one group: cheap, mostly small US companies from 1976 to 1996. That research does not show it works for every company or every period.
  • Most checks compare two years. A one-off event, such as a large acquisition or a write-down, can flip a check without saying much about the business.
  • It does not read banks and insurers fairly. Deposits, loans and premiums are their business, so debt, liquidity and gross margin mean something else there. PlainTicker does not apply it to them.
  • PlainTicker's own backtest of its classification rule, which uses more than the F-Score, found no statistically significant edge in selection.
05

How PlainTicker computes it

  • From each company's annual reports filed with the SEC: the latest completed fiscal year against the one before, with both years in the company's reporting currency.
  • When a figure is missing, that check is marked n/a and does not count as a pass. The company page says how many checks were unavailable, so a 7 out of 9 with one gap is not read as two failures.
  • Return on assets, the debt check and asset turnover divide by total assets at the end of each year. The paper uses the start of the year or the year's average; the year-end figure is a common simplification.
  • For new shares we compare share counts after adjusting for stock splits and treat a rise of up to 0.5% as noise. A change too large to explain without a verified split leaves the check n/a.
  • The F-Score stands on its own. It is shown next to the sector comparison and does not enter the composite score.

This page explains a measure. It is not investment advice.