What is the Piotroski Score?

The Piotroski Score is a financial tool used to assess the health and strength of a company's stock.

Created by Joseph Piotroski, an accounting professor, the score is designed to help value investors identify firms with strong fundamentals. It focuses on companies with low price-to-book (P/B) ratios, often overlooked in the market, but with signs of financial improvement.

This system assigns a score between 0 and 9, with each point reflecting a positive signal in the company’s financials. The higher the score, the stronger the company's financial health.

Piotroski's method has become a popular tool among value investors who want to separate hidden gems from stocks that seem cheap but have weak fundamentals.

How Does the Piotroski Score Work?

The Piotroski Score evaluates a company's financials using nine criteria. These criteria are divided into three main categories: profitability,leverage/liquidity, and operating efficiency. Each factor earns the company either a 1 (positive result) or a 0 (negative result). The sum of these points forms the Piotroski Score, which ranges from 0 to 9.

Here’s a breakdown of the nine criteria:

1. Profitability (4 points total)

• Net Income – Positive net income in the past year (1 point).
• Return on Assets (ROA) – Improvement in ROA from the prior year (1 point).
• Operating Cash Flow (OCF) – Positive operating cash flow (1 point).
• Accruals – Operating cash flow exceeds net income, signaling strong cash flow quality (1 point).

2. Leverage, Liquidity, and Funding (3 points total)

• Change in Leverage – Lower debt-to-assets ratio compared to the prior year (1 point).
• Change in Current Ratio – Improved current ratio, indicating better liquidity (1 point).
• No New Share Issuance – No new shares issued in the past year (1 point).

3. Operating Efficiency (2 points total)

• Change in Gross Margin – Higher gross margin than the previous year (1 point).
• Change in Asset Turnover – Improved asset turnover ratio, showing better efficiency (1 point).

Each of these nine factors reflects a sign of improving financial health. A company that meets all nine criteria would have a Piotroski Score of 9, while a company that fails on all measures would score a 0.

NVDA Stock example >>

What is a Good Piotroski Score?

A "good" Piotroski Score depends on how an investor uses the tool. Generally, a score of 7 to 9 is seen as strong. Companies in this range show multiple signs of financial improvement and are less likely to be "value traps."

Here's a quick guide on how to interpret Piotroski Scores:

• 0 to 2: Weak financial health. High-risk stocks.
• 3 to 6: Mixed signals. Further analysis required.
• 7 to 9: Strong fundamentals. Potential investment opportunity.

Investors often seek out stocks with scores of 7 or higher. These firms are more likely to have improving financials and better growth potential.

On the other hand, a score below 3 may signal serious financial trouble. These companies often have declining margins, poor cash flow, or rising debt. Such stocks are at risk of underperforming or facing distress.

How Accurate is the Piotroski Score?

The Piotroski Score has been shown to deliver strong results in backtests, especially when applied to low price-to-book (P/B) stocks. Research by Piotroski himself found that high-scoring stocks outperformed low-scoring ones by a wide margin.

In practice, the Piotroski Score is not foolproof, but it is an effective screening tool. It works well when combined with other analysis methods. Here's why:

• Historical Evidence – Studies suggest that high-Piotroski Score stocks tend to outperform low-score stocks. Investors targeting firms with scores of 7 or higher have seen better-than-average returns.
• Simplicity and Objectivity – The score is simple to calculate and relies on objective financial data. This makes it less prone to bias than qualitative judgments.
• Focus on Turnaround Stories – The score works best with low price-to-book (P/B) stocks. These firms often face skepticism, but Piotroski's system identifies which of them are on a recovery path.

Limitations of the Piotroski Score

• Limited Scope – It works best for value stocks (low P/B ratio) but may not be as effective for growth stocks or companies in early-stage development.
• Backward-Looking – The system relies on past financial data. It does not predict future events like market shifts, regulatory changes, or competitive disruptions.
• Ignores Valuation – A high Piotroski Score indicates financial improvement but says nothing about whether a stock is over- or undervalued. Investors should use valuation metrics like P/E or P/B ratios alongside the score.

Strategy Tip: Don’t rely on the score alone. Consider industry trends, growth potential, and risks.

While no system guarantees success, the Piotroski Score is a reliable starting point for finding solid value stocks. It reduces the chances of buying into troubled companies and increases the odds of identifying true turnarounds. Backtests show that firms with high scores tend to outperform their peers. But like any financial metric, the Piotroski Score works best when combined with other tools. Investors should use it as a guide, not a guarantee.

By focusing on measurable financial improvements, the Piotroski Score gives investors a clear way to separate potential winners from risky bets.

Disclaimer: This article is not intended as investment advice. Investing involves risk, and your capital may be at risk.