TBI: Calculation of Piotroski’s score from financial statements

Joseph Piotroski published this paper in 2000 which gained a lot of popularity within the value investing industry. In his paper the author proposed a simple financial score that can in theory differentiate winners from losers within high book-to-market stocks.

In this story we aim to explain the reader how this score is replicated in The Boring Investment and how it can also be calculated on your own if you have access to financial statements of the stocks.

The score is calculated as the sum of nine flags, four profitability indicators, one leverage, one liquidity, one related with the source of funding and two for operating efficiency respectively:

• F_ROA is equal one when return on assets (net income before extraordinary divided by total assets) is positive.
• F_CFO is equal one when net cash from operating activities is positive.
• F_ROA_1Y_TREND equal to one when there is an increase of ROA from today’s financial statement compared to year before report date.
• F_ACCRUAL equal one if net cash from operating activities is higher than net income before extraordinary.
• F_LEVER equal one when there is decrease of the ratio total non-current liabilities divided by total assets comparing this year vs previous year statements.
• F_LIQUID equal one when there is an increase in the current ratio for the same year-to-year comparison. Current ratio is defined as Current Assets / Current Liabilities.
• F_EQ_OFFER equal zero if the company has issued new shares as a source of funds.
• F_MARGIN equal one when Gross profit margin has increased year-to-year.
• F_TURN equal one when there is an year-to-year increase in asset turnover ratio.

The sum of the above nine indicators is the result of Piotroski’s financial score (F_SCORE).

Let’s have a look at an example to see how this works in practice. We will select Apple Inc. stock for this exercise.

To define F_ROA we calculate return on assets as follow:

F_ROA calculated for AAPL stock

For F_CFO we need to find net cash from operating activities in the Cash Flow statement:

F_CFO calculated for AAPL stock

F_ROA_1Y_TREND is the first flag that needs financial statements from previous year:

F_ROA_1Y_TREND calculated for AAPL stock

In F_ACCRUAL we compare cash from operating activities with net income, this is the last profitability driver:

F_ACCRUAL calculated for AAPL stock

F_LEVER is calculated from current and previous year size of total non-current liabilities

F_LEVER calculated for AAPL stock

For F_LIQUID we need the current ratio (current assets divided by current liabilities) and the current ratio of the previous fiscal year, if the ratio is higher this year the score is equal 1.

F_LIQUID calculated for AAPL stock

In F_EQ_OFFER we have considered the amount of basic shares reported in the balance sheet.

F_EQ_OFFER calculated for AAPL stock

The first operating efficiency score is F_MARGIN, for that one we need to calculate the ratio gross profit to revenues for the current and previous fiscal year.

F_MARGIN calculated for AAPL stock

The last score, also in the section of operating efficiency, is F_TURN. The assets turnover ratio is calculated in our code as Revenues / Total Assets and the F_TURN value is equal one if there is an increase of the ratio compared to previous fiscal year.

F_TURN calculated for AAPL stock

The total financial score as proposed by Piotroski for AAPL is 7, as it’s the sum of the 9 scores calculated above.

In upcoming story we will test the performance of this score as a value investing approach.

Author’s financial score and the indicators that compose this score are available in The Boring Investment screener for all US stocks at a recent snapshot. Subscribers can access this score in case they want to make your own portfolio selection.

Visit our website for more information and to start making boring investments when accessing our application of academic value investing studies using current data.