Piotroski Score: 9 Criteria for Analyzing Value Stocks

What is Piotroski Score?

The Piotroski Score is a 9-point financial scoring system developed by Joseph Piotroski to evaluate the strength of value stocks, especially those with low price-to-book ratios. It helps investors assess financial health by analyzing profitability, leverage, liquidity, and operating efficiency from company financial statements.

This score is widely used in factor investing to identify undervalued stocks with improving fundamentals and avoid value traps.

Key Characteristics

The Piotroski Score is based on nine binary criteria grouped into three categories:

• Profitability Metrics: Includes positive net income, positive return on assets, positive operating cash flow, and operating cash flow exceeding net income.
• Leverage and Liquidity: Measures reductions in long-term debt, improvements in current ratio, and absence of new share issuance.
• Operating Efficiency: Evaluates increases in gross margin and asset turnover ratio compared to the prior year.
• Scoring Range: Scores range from 0 (weak) to 9 (strong), helping distinguish financially healthy companies from weak performers.
• Financial Statements: Relies on data primarily from annual 10-K reports to compare current and previous year results.

How It Works

The Piotroski Score assigns one point for each of the nine criteria met by a company, with a maximum of 9 points signaling strong financial health. Investors use this score to filter value stocks by identifying those with improving profitability, lower leverage, and better operating efficiency.

This method helps you avoid companies that appear cheap but have deteriorating fundamentals. The score’s reliance on accounting data makes it a practical tool to complement other valuation metrics, such as the best value stocks criteria.

Examples and Use Cases

Investors often apply the Piotroski Score to screen stocks within value-oriented portfolios and compare performance across industries.

• Exchange-Traded Funds: Funds like SPY and IVV may include stocks with high Piotroski Scores to enhance portfolio quality.
• Airlines: Companies such as Delta demonstrate how operational efficiency and cash flow metrics contribute to a higher Piotroski Score.
• Growth vs. Value: While Piotroski focuses on value stocks, combining it with growth-focused approaches like those in the best growth stocks guide can diversify strategy.

Important Considerations

While the Piotroski Score is a powerful tool for evaluating financial strength, it is backward-looking, relying on historical financial data that may not capture future risks or qualitative factors such as management quality. You should use it alongside other analysis methods for a well-rounded view.

Also, the score may be less effective in sectors with inherently volatile earnings or non-manufacturing industries. Understanding the underlying components, including how metrics like earnings and liquidity interact, is crucial before making investment decisions.