The Piotroski Score is a method to determine the financial health of a company.
The Piotroski Score was developed by University of Chicago professor Joseph Piotroski and first published in 2000 in a paper called Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.
The score ranges from 0-9, with a score of 8-9 being very strong and 0-2 being very weak. A company gets one point for each of the following criteria:
- Positive return on assets in the current year
- Positive cash flow from operations in the current year
- Higher return on assets in the current year than the last year
- Cash flow from operations are greater than return on assets
Leverage, liquidity, and source of funds
- Leverage ratio this year is less than last year
- Current ratio is higher this year than last year
- The company did not issue any new shares in the last year
- Gross margin is higher this year than last year
- Asset turnover ratio is higher this year than last year
Piotroski found that shorting companies with a very weak score and buying companies with a very high score would have led to annual profits of 23% from 1976 to 1996.