Piotroski F-Score: a nine-point financial strength check
The Piotroski F-Score (Piotroski, 2000) grades profitability, leverage and efficiency on nine criteria to show whether financial strength is improving. Each criterion scores 1 if passed and 0 otherwise, for a total of 0 to 9. Several criteria ask about change from the prior year rather than only the absolute level.
The nine criteria
| Area | Criterion (1 point if passed) | Example result |
|---|---|---|
| Profitability | ROA is positive | ✓ |
| Profitability | Operating cash flow is positive | ✓ |
| Profitability | ROA improved on the prior year | ✓ |
| Profitability | Operating cash flow exceeds net income | ✓ |
| Leverage and liquidity | Borrowings ÷ total assets decreased | ✓ |
| Leverage and liquidity | Current ratio improved | ✓ |
| Leverage and liquidity | No new shares issued (equity growth explained by net income) | ✓ |
| Efficiency | Gross margin improved | ✓ |
| Efficiency | Asset turnover improved | ✗ |
Zones (scaled to 9): 7 or more is strong, 3 or fewer is financial-distress risk, in between is middle. If some criteria cannot be computed, the result is scaled to 9 from the share of computable criteria.
Worked example
The score for the fictional company used throughout these guides, current versus prior year. The figures come from Caveat's calculation engine.
The score is 8 of 9, in the strong zone. The criterion not met is asset turnover: revenue grew, but total assets grew faster, so turnover eased slightly.
How to read it
- The failed criteria, more than the total: where the points were lost is more useful than the sum. Losses in leverage point to borrowing or liquidity; losses in efficiency point to margin and turnover.
- Change-based criteria: five of the nine (ROA, borrowings ratio, current ratio, gross margin, turnover) ask about improvement over the prior year, so a company already at a high level has less room to improve and is penalised.
- Trend: a multi-year pattern means more than one year's score.
Both sides: a low score is not necessarily a bad year: borrowing for capital expenditure or a product launch can lower turnover for a while. A high score means better than last year, not that the level is sufficient.
Limitations
- It was designed to select stocks with a low market-to-book ratio. Using it to check the financial strength of private SMEs is an adaptation.
- Caveat estimates operating cash flow from net income, depreciation and working-capital changes, not from a cash flow statement.
- The long-term debt criterion uses total borrowings ÷ total assets, since only the total is collected.
- No new shares issued is approximated by whether equity growth is explained by net income.
- This is reference analysis and does not replace credit, investment or tax decisions.
See it in your own statements
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FAQ
- What is a good Piotroski F-Score?
- Generally 7 or more points is read as strong and improving, and 3 or fewer as weak. Because the criteria measure change from the prior year, consider the industry and the company situation too.
- How is it different from the Dechow F-Score?
- The Piotroski F-Score grades financial strength on nine criteria, while the Dechow F-Score estimates the probability that reported earnings are misstated. Only the name is similar.
- How can it be calculated without a cash flow statement?
- Caveat estimates operating cash flow with the indirect method from net income, depreciation and changes in receivables, inventory and payables. It can differ from an actual cash flow statement.
- Which financial statement items are needed?
- Current and prior-year net income, total assets, revenue, cost of sales, current assets, current liabilities, borrowings, equity, receivables, inventory, payables and depreciation.