Technicals Stability Returns

Piotroski F Score

The Piotroski F-Score is a combination of 9 criteria that reflects the financial strength of companies. It is a discrete score between 0 to 9. For every criterion met out of 9 criteria one point is rewarded. This metric is useful to judge value stocks. The Piotroski F-Score is named after its inventor, Accounting Professor Joseph D. Piotroski. He published it in the year 2000 while at the University of Chicago, and it was entitled as Value Investing: The use of historical financial statement information to separate winners from losers.

Piotroski F-Score of Asian Paints Ltd

Piotroski Criteria Satisfy Criteria Points
✦ Positive net income in the current year. Yes 1
✦ Positive Return on Assets (ROA) in the current year. Yes 1
✦ Positive Operating Cash Flow in the current year. Yes 1
✦ Higher Operating Cash Flow compared to net income. Yes 1
✦ Lower Debt to Equity ratio compared to the previous year. Yes 1
✦ Recent year's Current Ratio is higher compared to the previous year. Yes 1
✦ No new equity issue in current year Yes 1
✦ A higher Gross Margin compared to the previous year. Yes 1
✦ Higher Asset Turnover Ratio compared to the previous year. No 0
Sum of All Points 8

Asian Paint's total Piotroski score in 2021 was 8 out of 9, which indicates the company has strong financial strength according to the Piotroski method.

The range indicator of the Piotroski F Score is divided into three categories: Companies with an F score between 0-2 are considered financially weak, companies with an F score range between 3-7 are considered stable and average. And lastly, the companies with an F score of 8-9 are considered financially strong.

Criteria Content
• Net Income - Net Profit or Net Income is measured by sales minus the Cost of goods sold, general and administrative expenses, operating expenses, other expenses, depreciation, interest, and taxes, etc. Net Profit is found in the Income statement of the company.

• Operating Cash Flow - It is the amount of cash the company generates from its continuous operations. And it is part of a company's Cash Flow Statement.

• Return on Assets (ROA) - The return on assets (ROA) is a commonly used profitability ratio that shows how effectively a company uses its assets to generate profit.

• Debt to Equity Ratio - Debt to Equity Ratio shows the relationship between the company's total debt and total shareholders fund. And it indicates whether the company is financially healthy or not and the ability of a company's shareholders' equity to pay its debt obligations in a tough time. It signifies the long-term solvency position of the company.

• Current Ratio - The Current Ratio is used to assess the short-term financial position of a company's concern. That means it indicates the company's ability to meet its short-term obligations that are due within one year. It is calculated as Current Assets divided by Current Liabilities.

• Equity Shares Issued - It refers to the number of shares issued by the company and common stock as represented by outstanding shares multiplied by the face value of each share on the balance sheet.

• Gross Margin - Gross Margin is calculated by subtracting the cost of goods sold (COGS) from net sales. It refers to the amount a company retains after incurring direct costs associated with the production of the goods and services it sells. It is also known as Gross Profit Margin.

• Asset Turnover Ratio - Asset turnover ratio is a profitability ratio that measures how efficiently a company utilizes its assets to generate revenue, and it is based on an annual basis. It is calculated by dividing total sales by average assets.

How to Use Piotroski Score
Professor Piotroski uses 9 criteria that indicate the financial strength of the company, based on Income Statement, Balance Sheet, Cash Flow statement, and some financial ratios. Investors can use Piotroski F-Score to understand the financial strength of the company. For every criterion met one point is awarded to the company. Investors should look for companies with an F-Score of 8-9. And also, investors may consider the stock with an F-score between 3-7 but also check other factors related to it.

In his research paper, he shows that the return by high book-to-market investors can be increased by at least 7.5% annually by selecting financially strong Book-to-market companies, while the entire distribution of realized returns is shifted to the right. Furthermore, an investment strategy that buys winners and shorts losers generated a 23% annual return between 1976 and 1996, and the strategy is robust across time and to controls for alternative investment strategies. Among the portfolio of high BM firms, financial statement analysis is more beneficial to small and medium-sized companies, companies with low stock turnover, and firms with no analyst following, yet this superiority still exists.

Professor Piotroski studies and notices a very weird pattern in the study. So he did backtesting by taking historical data of many years and testing it in some theory. The results of his analysis showed that buying top stocks and shorting the worst stocks in 19976 to 1996, based on his Petroski score, gave him a 23% annualized gain.

Professor Piotrosk invented F-score and published it in 2000, and it was named after him as Piotroski F-Score. He is an American professor of accounting at Stanford University and a senior fellow at the Asian Bureau of Finance and Economics Research. He was a professor of accounting at the University of Chicago Booth School of Business from 1999 to 2007 before joining the faculty at Stanford University in 2007. Professor Piotroski is a member of the editorial advisory of the accounting review and the journal of accounting and economics. He is an expert in accounting and financial reporting and is well known in the investing world for an influential paper he wrote in 2000 while at the University of Chicago, it is entitled as Value Investing: The use of historical financial statement information to separate winn returns earned by an investor when applied to a portfolio of high book-to-market firms. His research has been cited in publications such as Bloomberg Business Week, SmartMoney Magazine, and Investor's business daily.

The Piotroski F-Score is an important metric to assess the financial strength based on its fundamentals. Investors should look for companies with a Piotroski F-Score of 8-9 as it indicates they are financially strong. Companies with a score between 3 to 7 indicate that they are stable, but investors should check other factors with the Piotroski F-score. Investors should beware of companies with an F-score between 1-2.