What is the Piotroski Score?
The Piotroski Score is a number from 0 to 9 that helps investors figure out how healthy a company is financially—especially companies with cheap stock prices (also called value stocks).
It was created by Joseph Piotroski, an accounting professor at Stanford University.
Think of it like a report card for a company’s finances:
- 9 means excellent health,
- 0 means poor health.
Contents
🧠 Why is it Useful?
Let’s say you find a company whose stock is really cheap. You might think it’s a good deal, like finding an iPhone for $100.
But… what if it’s broken?
The Piotroski Score helps you check whether the company is actually strong or falling apart. So you don’t buy a “cheap” stock that’s a bad investment.
✅ How is the Score Calculated?
It checks 9 simple yes-or-no questions (each worth 1 point). These questions are grouped into 3 categories:
📊 1. Profitability (4 points)
These check if the company is actually making money.
| Test | What it Checks | Score if… |
|---|---|---|
| 1. Net Income | Did the company make a profit this year? | 1 point if profit, 0 if loss |
| 2. Operating Cash Flow | Is the cash from business operations positive? | 1 if yes, 0 if no |
| 3. Return on Assets (ROA) | Is the company making good use of its assets? | 1 if ROA > 0, 0 otherwise |
| 4. Cash Flow > Net Income | Is real cash flow better than paper profit? | 1 if yes, 0 if no |
🧠 Why this matters: It shows whether the company is really earning money and not just showing profits through accounting tricks.
💰 2. Leverage, Liquidity, and Funding (3 points)
These check if the company is financially stable (not drowning in debt).
| Test | What it Checks | Score if… |
|---|---|---|
| 5. Decrease in Leverage | Is debt under control? | 1 if debt ratio went down, 0 otherwise |
| 6. Current Ratio Up | Can the company pay its short-term bills? | 1 if current ratio improved, 0 otherwise |
| 7. No New Shares Issued | Did the company avoid raising money by diluting shares? | 1 if no new shares, 0 otherwise |
🧠 Why this matters: Too much debt or issuing more stock to raise money can be red flags.
📈 3. Operating Efficiency (2 points)
These check if the company is getting better at running its business.
| Test | What it Checks | Score if… |
|---|---|---|
| 8. Gross Margin Up | Is the company keeping more profit per sale? | 1 if gross margin increased, 0 otherwise |
| 9. Asset Turnover Up | Is the company using its assets more efficiently? | 1 if asset turnover improved, 0 otherwise |
🧠 Why this matters: A company should aim to become more efficient over time.
🔢 Example: A Real Company
Let’s take a pretend company called TechyShoes Inc. Here’s its situation:
- Made a profit this year ✅ → 1 point
- Positive cash flow ✅ → 1 point
- Return on assets is positive ✅ → 1 point
- Cash flow > Net income ❌ → 0 points
- Debt went up ❌ → 0 points
- Current ratio improved ✅ → 1 point
- Issued more shares ❌ → 0 points
- Gross margin improved ✅ → 1 point
- Asset turnover worsened ❌ → 0 points
Total Score = 1 + 1 + 1 + 0 + 0 + 1 + 0 + 1 + 0 = 5
So, TechyShoes Inc. has a Piotroski Score of 5. That’s average—not too strong, not too weak.
🟢🟡🔴 How to Use the Score:
| Score | What It Means |
|---|---|
| 7–9 | Strong company — good financial health |
| 4–6 | Okay company — mixed signals |
| 0–3 | Weak company — be cautious |
Investors often look for scores of 7 or more when picking value stocks.
🧠 Final Thought
The Piotroski Score is not a guarantee, but it’s a great first filter to avoid weak companies when hunting for good deals.
