# Piotroski F-Score

Piotroski only looks at stocks in the lowest third (tertial) of the market cap population (33% of all market caps) and the highest fifth (quintile) of the book-to-market population. He focuses on companies that are small to medium and are financially distressed and also have a very poor coverage by analysts (ideally zero analysts).

As a consequence we will at first limit our population by the following conditions

- Lower 1/3 of all market caps
- Top 20% of book-to-market stocks
- Zero analyst coverage or coverage older than 1 year (or alternatively use stocks with less than 10 analysts coverage)

We therefore sort all stocks by market cap and only keep the lower 1/3rd of that population (lower 33%). Similary we sort all stocks again by book-to-market and only keep the stocks with the highest book-to-market of the the top 1/5th (top 20%)!

What is the book-to-market? The book-to-market is the inverse of a more well known parameter called price-to-book.

Piotroski's F-Score is calculated by summing over 9 parameters.

##### 1 : ROA > 0

The **return on assets** (ROA) is a ratio that measures
the dollars in net profit a business generates per dollar of assets it owns. If it is positive F_Score(ROA) = 1
otherwise 0.

##### 2 : CFO > 0

This measure is the ratio of **operating cash flow** divided by ** total assets**. If it is positive
F_Score(CFO) = 1 otherwise 0.

##### 3 : ∆ROA > 0

Is the year-2-year change in ROA positive? If this is positive the F_Score(∆ROA) = 1 else 0.

##### 4 : Accrual CFO > ROA

Is CFO greater than ROA? If it is greater then F_Score(CFO>ROA) = 1 else 0.

##### 5: ∆LEVER ≦ 0

It is the historical change in the ratio of **total long-term
debt** to **average total assets**.
An increase in this ratio is negative and therefore F_Score(∆LEVER)=0 otherwise 1.

##### 6: ∆LIQUID > 0

It measures the change in the ** current ratio** between
current and previous year. An increase in the current ratio is positive and therefore F_Score(∆LIQUID)=1 otherwise 0.

##### 7: ∆EQ_OFFER > 0

An increase in the** floating number of shares**, i.e. an
increase in common equity, in other words a dilution of share holder value is negative and if the floating number of
shares has increased since 1 year prior the F_Score(∆EQ_OFFER) = 0 otherwise 1.

##### 8: ∆MARGIN

The year-to-year change of the ratio of **gross margin**
and **total sales** defines this measure. If the change is
positive then F_Score(∆MARGIN) = 1 else 0.

##### 9: ∆TURN

This measure is defined as the change in the company's current year asset turnover ratio, which is the ratio of **total sales**
and **beginning of the year total assets.** A year on year
inrease is positive and we set the F_Score(∆TURN) = 1 otherwise 0.