Piotroski F-Score: nine tests of financial strength

Joseph Piotroski introduced the F-Score in his 2000 study of value stocks. It combines nine accounting signals into an assessment of financial strength. The first four checks examine profitability and cash generation, the next three examine funding and liquidity, and the last two examine operating efficiency.

F-Score = number of tests passed. Each pass adds one point; each fail adds zero. Here are the rules used by Stock Meadow, comparing the latest two annual reporting periods where a comparison is required.

1. Profitable. Net income divided by total assets is above zero.
2. Cash-generative. Operating cash flow is above zero.
3. Return on assets improved. Net income divided by total assets is higher than in the prior fiscal year.
4. Cash beats earnings. Operating cash flow is greater than net income.
5. Less leverage. Long-term debt divided by total assets is no higher than in the prior fiscal year.
6. Better liquidity. Current assets divided by current liabilities is higher than in the prior fiscal year.
7. No dilution. Diluted weighted-average shares are no more than 0.5% above the prior fiscal year.
8. Gross margin improved. Gross profit divided by revenue is higher than in the prior fiscal year.
9. Asset turnover improved. Revenue divided by total assets is higher than in the prior fiscal year.

Return on assets and asset turnover use each year's fiscal year-end assets in Stock Meadow. Net income comes from the income statement, operating cash flow from the cash flow statement, and the debt, assets and liquidity figures from the balance sheet.

Imagine a fictional company with the following annual figures. It passes seven tests and fails two. Dollar amounts and ratios below are illustrative and do not describe a listed company.

Raw F-Score: 7 / 9. Stock Meadow puts this on the same scale as its other scoring models: 7 ÷ 9 × 100 = 77.8, displayed as 78 out of 100. The raw score remains seven tests passed.

The share-count test fails because 1% growth exceeds Stock Meadow's 0.5% tolerance. Asset turnover also fails because it was unchanged. The leverage test passes because the debt-to-assets ratio did not rise.

1. Select Piotroski F-Score in the scoring-model picker.
2. Apply any company or valuation filters you want before scoring.
3. Open the score breakdown to inspect all nine pass/fail results.

The score is absolute. Changing the other companies in your screen does not change a company's checklist result. Compare within each sector and custom metric weights do not apply to this model. Equal scores are listed alphabetically by ticker.

Stock Meadow excludes Financial Services and companies without the two annual periods and required inputs. The screener currently requires at least ten eligible companies to show ranked results, even though the F-Score itself does not rely on peer ranks.

There are practical differences from the original paper. Stock Meadow uses fiscal year-end assets for its ratios, treats unchanged leverage as a pass, and uses diluted weighted-average share count with a 0.5% tolerance as its dilution check. The paper uses beginning-of-year or average assets for some ratios and checks common equity issuance. These choices can change individual test results.

The raw F-Score also appears as a financial-strength check on individual stocks and is available as a filter. The methodology explains how this fits alongside the other scoring models and risk checks.

• More passes mean more favourable accounting signals. A high score does not establish that the share price is attractive.
• Every test has equal weight. A tiny improvement and a large improvement can each earn the same single point.
• The inputs look backward. Annual reports can lag changes in a company's business, and unusual items can affect comparisons.
• Industry context still matters. Balance-sheet structure and cash-flow patterns vary between businesses.

Use the checklist to decide which financial trends deserve a closer look. Read the underlying statements and compare valuation and business risks before making an investment decision. A score of 78 does not mean a 78% chance of a profitable investment.

To compare financial strength with a model that also includes valuation, read the Magic Formula guide.

Joseph D. Piotroski, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, Journal of Accounting Research, 2000. An accessible copy of the paper is hosted by Ivey Business School.

The paper provides the original research context. The calculations and fictional example above describe Stock Meadow's implementation.