Joseph Piotroski, an accounting professor, developed a nine point scoring system to increase the returns of a strategy of investing in low price to book value companies.

Buying only those companies that scored highest (8 or 9) on his nine-point scale, or F-Score as he called it, over the 20 year period from 1976 to 1996 led to an average market out-performance 13.4%.

**How is the Piotroski or F-Score calculated?**

**Profitability**

1. Return on assets (ROA)

Net income before extraordinary items for the year divided by total assets at the beginning of the year.

Score 1 if positive, 0 if negative

2. Cash flow return on assets (CFROA)

Net cash flow from operating activities (operating cash flow) divided by total assets at the beginning of the year.

Score 1 if positive, 0 if negative

3. Change in return on assets

Compare this year’s return on assets (1) to last year’s return on assets.

Score 1 if it’s higher, 0 if it’s lower

4. Quality of earnings (accrual)

Compare Cash flow return on assets (2) to return on assets (1)

Score 1 if CFROA>ROA, 0 if CFROA<ROA

**Funding**

5. Change in gearing or leverage

Compare this year’s gearing (long-term debt divided by average total assets) to last year’s gearing.

Score 1 if gearing is lower, 0 if it’s higher.

6. Change in working capital (liquidity)

Compare this year’s current ratio (current assets divided by current liabilities) to last year’s current ratio.

Score 1 if this year’s current ratio is higher, 0 if it’s lower

7. Change in shares in issue

Compare the number of shares in issue this year, to the number in issue last year.

Score 1 if there is the same number of shares in issue this year, or fewer. Score 0 if there are more shares in issue.

**Efficiency**

8. Change in gross margin

Compare this year’s gross margin (gross profit divided by sales) to last year’s.

Score 1 if this year’s gross margin is higher, 0 if it’s lower

9. Change in asset turnover

Compare this year’s asset turnover (total sales divided by total assets at the beginning of the year) to last year’s asset turnover ratio.

Score 1 if this year’s asset turnover ratio is higher, 0 if it’s lower

Evaluation

Piotroski or F-Score = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9

Good or high score = 8 or 9 = Good F-Score

Bad or low score = 0 or 1 = Bad F-Score

**Read more about the Piotroski F-Score investment strategy**

You can read more about the Piotroski F-Score investment strategy here: **Piotroski strategy back test**

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