Skip to main content
Forensic AnalysisLesson 1 of 3 · The detectors

Investor frameworks

The Piotroski F-Score

Nine pass-or-fail accounting tests that separate improving businesses from deteriorating ones — built for value stocks, where the cheap and the broken look alike.

5 min readIntermediateLast checked against the product on

Why nine binary tests

Piotroski started from an awkward fact about value investing: a portfolio of cheap stocks contains both companies the market has mispriced and companies the market has correctly given up on. Averaged together, the winners carry the losers.

His answer was deliberately crude — nine tests, each scored 1 or 0, summed into a score from 0 to 9. No weights, no regression, nothing to overfit. The crudeness is the point: it is hard to torture nine binary flags into saying what you want.

The nine signals

Profitability

  1. Positive return on assets
  2. Positive operating cash flow
  3. Return on assets improved year over year
  4. Operating cash flow exceeds net income — earnings backed by cash, not accruals

Leverage, liquidity and funding

  1. Long-term debt to assets fell
  2. Current ratio improved
  3. No new shares issued — existing owners were not diluted

Operating efficiency

  1. Gross margin improved
  2. Asset turnover improved

Reading the score

A score of 8 or 9 describes a business that is profitable, converting profit into cash, deleveraging and improving its margins — all at once. A score of 0 to 2 describes the opposite, and Piotroski found that the difference between those groups within the value universe was worth roughly 7.5% a year.

Two cautions that matter more than the number:

  • It is a within-value tool. Applied to expensive growth stocks the score still computes, but the evidence behind it does not transfer.
  • Every signal is year-over-year. A company that improved from terrible to merely bad scores well on several tests. The score measures direction, not level, and it is at its most useful read beside one that measures level.

Check yourself

4 questions. Nothing is recorded unless you are signed in, and nothing here affects anything else.

1. Piotroski built the F-Score for portfolios of cheap stocks. What problem inside value investing was it designed to solve?
2. The F-Score is nine pass-or-fail tests summed with no weights and no fitted model. What does that crudeness buy?
3. One test awards a point when operating cash flow exceeds net income. What does failing that test suggest?
4. A company improves from deeply troubled to merely weak and scores 8 of 9. What is the right reading?

4 questions left. An unanswered question counts as a miss, so the check waits for all of them.

Sources

Further reading