The Piotroski F-Score comes from Joseph Piotroski's work in identifying stronger companies from companies from a portfolio of high book to market firms (ie. companies that are potentially undervalued).
Through his analysis, he found that the mean returns increased substantially with his backtesting criteria. While firms with high book to market firms often have reason for being so, including lack of analyst coverage, limited disclosure policies, and recent financial distress, Piotroski's argues that the F-Score can be helpful in deciding if an undervalued stock is potentially worth pursuing.
Higher F-Scores classify a stock as a strong financial position, whereas low F-Scores classify a stock as likely to go bankrupt. The F-Score with a large group of stocks to further filter out stocks in weak financial positions with a strong likelihood of bankruptcy.
For more information, please see the original research available at this link
The F Score is the sum of nine components related to profitability, leverage and op. efficiency. These nine components are each given a pass (1) or fail (0). The sum of these parts results in the F-Score. For each criteria below that a company meets, it's F-Score is increased by 1.
- Return on Assets > 0
- Cash Flow from Operations / Total Assets > 0
- Increase in Return on Assets from prior period
- Return on Assets > Cash Flow from Operations / Total Assets
- Decrease in Debt to Equity Ratio from prior period
- Increase in Current Ratio from prior period
- Less Average Shares than prior period
Operating Efficiency Components
- Increase in Gross Margin from prior period
- Increase in Asset Turnover from prior period
The previous period for the TTM Piotroski calculation compares the most recent TTM period to the previous quarter's TTM.