Piotroski F-Score Strategy: Backtest and Performance Analysis

The Piotroski F-Score strategy, developed by Joseph Piotroski, has gained widespread popularity among stock market investors. Many investors claim to use it for selecting stocks. You may have heard about the Piotroski F-Score, but do you know what it means and how to use it? Let’s find out what the Piotroski F-Score strategy is.

The Piotroski F-Score strategy is a stock selection method that uses financial analysis to identify undervalued stocks with strong fundamentals. The score is calculated based on 9 criteria, including profitability, liquidity, and efficiency, with stocks scoring 8 or 9 considered to have strong fundamentals. The strategy was developed by Joseph Piotroski, a finance professor at Stanford University, and has become a popular method for selecting stocks among investors.

In this post, we take a look at the Piotroski F-Score strategy. At the end of the article, we have provided several backtests.

Understanding the Piotroski F-Score Strategy

The Piotroski F-Score strategy is a stock selection method that evaluates a company’s financial health to determine whether a stock has strong fundamentals. Value investors often use it to find the best value stocks. The strategy was developed by Joseph Piotroski, a finance professor at Stanford University, and is based on the idea that companies with strong financials tend to outperform those with weaker financials.

The F-Score is calculated based on 9 financial criteria: profitability, liquidity, and efficiency. Each criterion is assigned a score of 1 or 0, with a higher score indicating stronger financials. The 9 criteria are:

  1. Positive return on assets (ROA) in the last financial year
  2. Positive cash flow from operations in the last financial year
  3. Higher return on assets in the last financial year compared to the previous year
  4. Cash flow from operations is higher than net income
  5. Lower debt-to-total assets ratio in the last financial year compared to the previous year
  6. A higher current ratio in the last financial year compared to the previous year
  7. No issue of shares during the last year
  8. Higher gross margins in the last financial year compared to the previous year
  9. Higher asset turnover in the last financial year compared to the previous year

Stocks with a high F-Score (a score of 8 or 9) are considered to have strong financials, while those with a low score (0 to 4) are seen as stocks with poor financials. Using the Piotroski F-Score, investors can identify stocks likely to outperform the market based on their strong financial fundamentals.

While the Piotroski F-Score strategy has been commonly used for selecting value stocks, it has also proven to be a useful tool for growth stock selection. However, it is not a guarantee of success, and like any investment strategy, it’s important to use the Piotroski F-Score in conjunction with other tools and research to make informed investment decisions.