Piotroski F-Score was introduced by Professor Joseph D. Piotroski in his paper titled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers" published in January 2002 while he was teaching as an assistant professor in University of Chicago. He is now teaching in Stanford University Graduate School of Business, and has just promoted from associate professor to professor in 2016.
You can click here to download that interesting 39-pages paper written by Piotroski on his F-Score.
Piotroski backtested his F-Score screening method in his paper and concluded that by investing in the low price-to-book ratio companies filtered by the F-Score, one could have generated a 23% average yearly return from 1976 to 1996.
Today, Piotroski F-Score is used by quite a number of fund managers as well as individual investors in their value investment stock screening process. The F-Score has also been applied in many other academic papers and has so far proven to be effective for stock screening, especially when combined with other fundamental stock screening methods, such as Greenblatt's magic formula, etc.
A backtest by Olivier Dambrine (owner of MFIE Capital which operates the ValueSignals global stock screening website) revealed that a European stock portfolio establised by their Piotroski price-to-book screener is able to achieve an impressive 525% return between June 1999 and August 2011, while at the same period of time the S&P600 Europe including net dividends has a return of -15%. You can click here to read that article written by Olivier Dambrine on 1 September 2011.
The American Association of Individual Investors (AAII) also revealed in an article titled "2008 AAII Stock Screen Roundup: Piotroski Strategy Defeats the Bear" by Wayne A. Thorp that the F-Score was the only one of their 56 screening methodologies that had positive results in 2008 (up 32.6% on average across 5 stocks, versus -41.7% for all of the AAII strategies over the same period).
Piotroski F-Score is the sum of 9 binary (meaning, either 0 or 1) scores in 3 fundamental categories of the stock, as below:
- Did the company make a profit during the last 12 months?
- Did it generate any cash?
- Was it more profitable compared to the prior year?
- Did it make more cash than the reported profit?
Leverage, Liquidity and Source of Funds:
- Did the company increase its relative LT debt compared to the prior year?
- Did the company improve its ability to pay short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables)?
- Was the company not required to issue new shares to pay for its future obligations?
- Was the company able to improve its margins on sales?
- Was the company able to improve productivity?
The above 9 criterias are tested by the following financial conditions, comparing the current year with previous year:
- ROA > 0, EPS > 0
- Operating cash flow > 0
- ROA growth
- Operating cash flow > Net profit
- (Assets / LT Debt) increased
- Current Ratio increased
- Share Outstanding remains
- Gross Profit Margin increases
- Asset Turnover increases
You might want to double check if the counter is consistently scoring high F-Score throughout the years, or has been improving from lower F-Score to higher F-Score across the period. Below is the historical Piotroski F-Score Scorecard of Forrester Research Inc. as presented by ValueSignals website.
The scorecard above shows that the F-Score of the stock counter improved from quarter to quarter, from 5 in 2013 eventually to 9 in mid-2016. It also indicates which out of the 9 criterias had passed or failed the test in each of the quarters.
ValueSignals website provides a very handy and straightforward online service for systematic value investing to perform quantitative stock screening, stock comparison and stock information, currently covering as many as 33,600 stock counters listed in 44 countries around the world.
Beside Piotroski F-Score, ValueSignals website is also able to perform screening (including multifactor cross-screening) of:
- Greenblatt's Magic Formula
- O'Shaughnessy Value Composites
- Altman's Z-Score
- Beneish’s M-Score
- Benjamin Graham's Net Current Asset Value (NCAV) to Market ratio
- Price index
- ... and many more
As a user of ValueSignals, I recommend this website to all serious value investors and fund managers to boost your stock screening and selection process.