Using Piotroski Score for enhanced screening

Joseph Piotroski is an American professor who is famous for his work and coined the Piotroski score or F-score. His study looks into lower price-to-book firms, and found out that companies with a higher F score beat the benchmark over a time period.

By buying companies with high F score and shorting companies with low F score, the portfolio returned at least 20% more than the benchmark over the same period.

So, we can actually use these factors in order to look at whether a company is qualitatively sound, as a form of first level screen.

Net income
Score 1 if last year net income is positive
Operating Cash Flow
Score 1 if last year cash flow is positive
Return on Assets (ROA)
Score 1 if last year ROA exceeds prior-year ROA
Quality of Earnings
Score 1 if last year operating cash flow exceeds net income
Long-term debt versus assets
Score 1 if ratio of long-term debt to assets is down from the year-ago value
If LTD is zero but assets are increasing, score 1 anyway
Current Ratio
Score 1 if CR has increased from the prior year
Shares Outstanding
Score 1 if the number of shares outstanding is no greater than the year-ago figure
Gross Margin
Score 1 if full-year GM exceeds the prior-year GM
Asset Turnover
Score 1 if percentage increase in sales exceeds the percentage increase in total assets

Some scores take reference on a preceding year basis. We can enhance the score by checking for consistent trends over a specific time period too.

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