Definition:

The Piotroski F-Score is a financial scoring system developed by Joseph Piotroski to identify fundamentally strong companies based on their financial statements. It evaluates a company's financial strength by assessing nine criteria related to profitability, leverage, liquidity, and operating efficiency.

Formula:

The Piotroski F-Score is calculated by assigning one point for each of the following nine criteria met:

1. Positive net income.
2. Positive return on assets (ROA).
3. Positive operating cash flow.
4. Operating cash flow greater than net income.
5. Decrease in long-term debt ratio.
6. Increase in current ratio.
7. No new shares issued.
8. Increase in gross margin.
9. Increase in asset turnover ratio.

The total score ranges from 0 to 9.

How to use the metric:

Investors use the Piotroski F-Score to evaluate the financial health of a company. A score of 8 or 9 indicates a strong financial position, suggesting the company is a good investment opportunity. A score of 0 to 2 indicates weak financial health, suggesting the company may be a poor investment.

Limitations:

The Piotroski F-Score is based solely on historical financial data and does not account for future growth potential or qualitative factors. It may not be suitable for evaluating companies with unique business models or those in rapidly changing industries.

Applies to:

The Piotroski F-Score works best for traditional, asset-heavy industries such as manufacturing, retail, and utilities, where financial statements provide a clear picture of financial health.

Doesn't apply to:

The metric may not apply well to technology or high-growth industries, where intangible assets and rapid innovation play a significant role, as these factors are not captured in the F-Score's criteria.

Summary:

The Piotroski F-Score is a useful tool for assessing the financial health of companies in traditional industries by evaluating nine key financial criteria. While it provides a quick snapshot of a company's financial strength, it should be used in conjunction with other analyses and not as the sole basis for investment decisions.