Piotroski F-score-inspired

What this checklist is trying to capture

In 2000, accounting professor Joseph Piotroski published a paper asking a simple question: among cheap stocks (those trading at a low price relative to book value), can basic accounting signals separate the ones that recover from the ones that keep falling? His answer was nine yes/no tests, now known as the F-score. Each compares the latest fiscal year with the year before, and each earns one point. A score of 8 or 9 means the company's finances are clearly improving; 0 to 2 means they're deteriorating.

Piotroski designed the score for value stocks. We apply it to every S&P 500 company as a general check on whether financial health is getting better or worse, but keep in mind that his research results came from cheap stocks, not large growth companies.

The tests, and exactly how we compute them

"Year t" is the latest fiscal year; "t−1" the one before. Total assets are taken at the start of each year, as in the original paper.

Profitability

1. Positive return on assets: net income in year t divided by total assets at the start of year t is above zero.
2. Positive operating cash flow: cash from operations in year t is above zero.
3. Return on assets improved: ROA in year t is higher than in year t−1.
4. Cash flow exceeds net income: operating cash flow divided by beginning assets is higher than ROA. Profits backed by cash are more trustworthy than profits made of accruals.

Leverage and liquidity

5. Long-term debt ratio fell: long-term debt (excluding the current portion) divided by average total assets is lower than the year before. If the company had no long-term debt in either year, it passes.
6. Current ratio improved: current assets divided by current liabilities rose.
7. No new shares issued: the diluted weighted-average share count did not increase. Piotroski looked for equity issuance directly; share count is a close, data-friendly stand-in that also captures dilution from stock compensation.

Operating efficiency

8. Gross margin improved: gross profit divided by revenue rose.
9. Asset turnover improved: revenue divided by beginning total assets rose.

Reading the score

Because every test is a year-on-year change, a very strong company can score modestly simply because last year was even better. A drop in gross margin from 75% to 71% still loses the point. The score is about direction, not level, which is why it sits well alongside the Buffett-inspired checklist, which is about level.

Limitations

• Banks and insurers don't report gross margin or a current ratio in the usual way, so some tests show "n/a" for them.
• Big acquisitions or disposals can swing asset-based ratios without saying much about the underlying business.
• The score updates once a year per company, when its new 10-K is filed.

See how we score for data sources and update timing.