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Piotroski Score

The Piotroski Score is a method to determine the financial health of a company.

Expanded Definition

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:

Profitability

  • 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

Operating efficiency

  • 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.

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