For an investor, the most critical part is picking the right stocks for investment. Especially in these times of recession, only the companies which are fundamentally deep can sustain and beat the market with the character. Another part of stock picking is finding the right time to enter the market. Hence, any investor before going long for a stock has to do both fundamental analysis and technical analysis. And these analyses need our time and a bit of research. But what if we have an instant score for this. Yes. There are few measures available to screen the stocks such as Piotroski F-Score, Altman Z-Score, Modified C-Score etc. Here I want to explain one of the popular metrics among these i.e. Piotroski Score.
How the score is calculated?
The Piotroski F-score was first published in 2000 by Professor Joseph Piotroski. This score is measured on a scale of 0-9 based on 9 performance metrics comparing the previous year. These 9 metrics are segregated into three categories and the calculation is as follows:
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Metric |
Indicator |
Score |
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I. Profitability |
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1 |
Net Income |
Company's ability to make profits |
Positive - 1 Negative - 0 |
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2 |
Return on Assets |
How well a company's asset managed to earn Profits? |
More than Prev year -1 otherwise 0 |
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3 |
Operating Cash Flow |
Companies ability to generate operating cash flow |
Positive - 1 Negative - 0 |
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4 |
Operating Cash Flow Vs Net Income |
The quality of company's earnings based on its profit realization and excludes non cash items. |
Operating CF > Net Income - 1, else 0 |
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II. Leverage, Liquidity and Source of funds |
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5 |
Leverage |
Debt / Assets. Portion of assets financed by debt |
More than Prev year -1 otherwise 0 |
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6 |
Current Ratio |
Company's liquidity position to pay off Short term liabilities |
More than Prev year -1 otherwise 0 |
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7 |
Outstanding Shares |
Company's ability to grow without diluting equity |
No fresh issue- 1 Fresh Issue - 0 |
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III. Operating Efficiency |
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8 |
Gross Margin |
Operating margin of the company |
More than Prev year -1 otherwise 0 |
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|
9 |
Asset Turnover Ratio |
Efficient usage of company's assets |
More than Prev year -1 otherwise 0 |
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Evaluation of Stocks based on the score
This score gives a sound comparison of companies based on its previous performance and a score of 7-9 is considered as good score while on the other side score of 0-2 is an indicator of a weak company.
For my research on how good the piotroski score can be used for picking stocks, I ran a few filters using screener and the observations are
a. With Piotroski score of more than, Only 15% of the Companies in Large Cap and Midcap has given a ROE of <5% and in small cap 25%of stocks has given <5% returns.
|
Market Cap |
Piotroski Score |
Avg 3 yr ROE |
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|
>15% |
>5% |
<5% |
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Large Cap (>20K crores) |
> 6 |
51% |
35% |
14% |
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Mid Cap (>5K Cr and <20K Cr) |
> 6 |
51% |
34% |
15% |
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Small Cap (<5K Cr and >500 Cr) |
> 6 |
34% |
42% |
25% |
b. In Large and mid caps together only 30 companies has Piotroski score of 0-3. In Small cap, Stocks with Piotroski Score of 0-3, 42% companies failed to give returns >5%.
|
Market Cap |
Piotroski Score |
Avg 3 yr ROE |
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|
>15% |
>5% |
<5% |
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Small Cap (<5K Cr and >500 Cr) |
< 4 |
30% |
28% |
42% |
c. With a score of 9, only one stock out of 20 stocks has given a return less than 5%. (Market cap > 500 crores)
Limitations of the Score
This score compares the performance of the company with the previous year only. Hence in case of a cyclical sector or if there is any year of uncertainty like 2020, this score becomes difficult to compare as it will show lowest even if it is a quality stock. After 2021 annual results, this score can be high for most of the stocks, as in 2020, they showed poor performance. Since in all the screening apps only one year's score is available it becomes difficult to trust this metric.
While choosing micro cap stocks (Market cap < 500 crores), even if they have score of 9 and being quality stock, it may give negative or low returns because of lack of liquidity.
Conclusion
For DIY investors, this score can be used as a starting point in filtering the mid cap and small cap stocks for medium to long term. In general, large cap stocks have high volatility still it is a good start to pick. This score gives a overall view of company's growth and performance. You can find this score in money control, screener and other screening websites. But it is most important to consider the other factors such as business model, industry in which the company operates, peer company metrics and other financial ratios.
This article is for knowledge purposes only and doesn't involve any recommendation. Any views and comments are appreciated. For further queries, contact by mail at r.shreethoppae@gmail.com or through LinkedIn www.linkedin.com/in/carakshashree
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