# Piotroski Score: 9 Criteria for Analyzing Value Stocks

![Piotroski Score: A nine-point scoring system used to determine a company's financial strength.](https://www.investopedia.com/thmb/PSYrS_qACWzM-dBR4LLnNOpMgS0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Piotroski-score_final-c40a7a62a1cd480296cb9c4126752217.png)

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## What Is the Piotroski Score?

The Piotroski Score is a powerful tool for assessing a company's financial strength and potential as a value investment. Named after Joseph Piotroski, this score ranges from 0 to 9, with higher scores suggesting stronger financial health. It uses nine specific criteria derived from financial statements to distinguish between strong and weak investment opportunities, offering critical insights for investors.

By examining recent accounting results, investors can determine [value stocks](https://www.investopedia.com/terms/v/valuestock.asp), rewarding one point for each met criterion. This simple yet effective scoring system helps distinguish between strong and weak investments, with a higher score indicating a preferable value opportunity.

### Key Takeaways

*   The Piotroski score, ranging from 0 to 9, helps investors assess a company's financial strength by examining profitability, leverage, liquidity, and efficiency.
*   Developed by Joseph Piotroski, the score is calculated using nine distinct financial criteria from a company's statements to identify potential value stocks.  
    
*   Historically, investing in stocks with higher Piotroski scores has shown better performance, although it should be used as a component of a broader investment strategy.  
    
*   The score is particularly useful for analyzing companies with a low price-to-book ratio, helping investors target promising value stocks.  
    
*   Although effective, the Piotroski score should be complemented with broader market and economic analyses due to its reliance on historical data.

## Understanding the Categories of the Piotroski Score

The Piotroski score is broken down into the following categories:

1.  Profitability
2.  Leverage, liquidity, and source of funds
3.  Operating efficiency

### Key Profitability Indicators in the Piotroski Score

*   Positive net income (1 point)
*   Positive [return on assets](https://www.investopedia.com/terms/r/returnonassets.asp) (ROA) in the current year (1 point)
*   Positive [operating cash flow](https://www.investopedia.com/terms/o/operatingcashflow.asp) in the current year (1 point)
*   Cash flow from operations being greater than net Income (quality of earnings) (1 point)

### Evaluating Leverage, Liquidity, and Funding in the Piotroski Score

*   Lower amount of [long-term debt](https://www.investopedia.com/terms/l/longtermdebt.asp) in the current period, compared to the previous year (decreased leverage) (1 point)
*   Higher [current ratio](https://www.investopedia.com/terms/c/currentratio.asp) this year compared to the previous year (more liquidity) (1 point)
*   No new shares were issued in the last year (lack of dilution) (1 point).

### Analyzing Operating Efficiency with the Piotroski Score

*   A higher [gross margin](https://www.investopedia.com/terms/g/grossmargin.asp) compared to the previous year (1 point)
*   A higher [asset turnover ratio](https://www.investopedia.com/terms/a/assetturnover.asp) compared to the previous year (1 point)

## What Do Piotroski Score Numbers Reveal?

If a company has a score of 8 or 9, it is considered a good value. If the score adds up to between 0 and 2 points, the stock is considered weak.

In his April 2000 paper, Piotroski demonstrated that between 1976 and 1996, using the score method could yield a 23% annual return by buying stocks with high scores and shorting those with low scores.

Piotroski suggested beginning with stocks in the lowest 20% of the market based on [price-to-book](https://www.investopedia.com/terms/p/price-to-bookratio.asp) value.

As with any investment method, past outcomes don't guarantee future performance. If you want to learn more about the Piotroski score or other financial topics, consider taking a leading investing course.

## Applying the Piotroski Score: Practical Example

Here's an example of using the Piotroski scoring method with the hypothetical company, XYZ. These are the profitability calculations:

*   **Net income** ($323,000,000) (Score:1 point)
*   **ROA** (4.7%) (Score: 1 point)
*   **Net operating cash flow** ($696,000,000) (Score: 1 point)
*   **Cash flow from operations** ($696,000,000) > **net income** ($323,000,000) (Score: 1 point)

The leverage calculations are as follows:

*   **Long-term debt** ($110,000,000) versus prior year's long-term debt ($120,000,000) (Score: 1 point)
*   **Current ratio** (1.7) versus prior year's current ratio (2.0) (Score: 0 points)
*   **No new shares** **issued** (Score: 1 point)

The efficiency calculations are as follows:

*   **Gross margin** (28.9%) versus the prior year's gross margin (31.8%) (Score: 0 points)
*   **Asset turnover ratio** (1.11) versus prior year's (1.54) (Score: 0 points)

XYZ scored 6 out of 9, indicating it's an average value option according to the Piotroski method.

## How Reliable Is the Piotroski Score in Financial Analysis?

The Piotroski score is seen as a useful tool in financial analysis. It evaluates a company's financial health using multiple factors and is known for its simplicity and effectiveness in identifying value stocks.

## What Does a High Piotroski Score Mean?

High Piotroski scores are considered to be a good investment; those that have good value. These usually fall in the range of 8 to 9. Low Piotroski scores are considered poor investments and have a range between 0 to 2.

## What Is the Difference Between the Altman Z Score and the Piotroski Score?

The Piotroski score assesses financial strength while the Altman Z score assesses the likelihood of bankruptcy. Both determine their outcomes by assessing the financial information of a company.

## Final Thoughts on the Piotroski Score

The Piotroski score is a powerful tool for identifying value stocks by assessing a company’s financial health. It uses nine specific criteria to measure aspects like net income, return on assets, operating cash flow, leverage, liquidity, and operating efficiency.

High scores (8-9) suggest strong value opportunities, while low scores (0-2) warn of potential financial troubles. Although historically successful, the score should be a starting point in stock analysis, combined with broader market considerations for informed investment decisions.

> **Article Sources**
>
> 1.  Piotroski, Joseph D. "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers." _Journal of Accounting Research_, vol. 38, Supplement: Studies on Accounting Information and the Economics of the Firm, 2000, pp. 1-41.