Piotroski's 9 F-Score Value Investing Model
“Price is what you Pay; Value is what you get”
The Pitoroski F-score model is a 9 point model which could be used to assess the stock on basis of operating efficiency, profitability, leverage, liquidity and source of funds. The markets have seen panic sell due to the Corona virus outbreak and this creates an opportunity for value investing.
The model was first published in Joseph D Piotroski’s research paper : Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers where he has discussed his 9 point model. The idea behind the model was to invest in stocks which have strong financials and are basically doing well in the areas discussed. A company with a high score i.e. 7 to 9 which is a good investment prospect and for a company in the medium range of score of 4-6 can be evaluated based on the consistency of the performance and potential
The pattern of scoring is simple it is either zero or one based on the factors which are divided into areas of financial strength. Let us discuss the scoring model based on the areas of evaluation.
Operating Efficiency
Change in Gross Margin: One point if it is higher in the current year compared to the previous year otherwise zero.
Change in Asset turnover ratio: One point if it is higher in the current year compared to the previous year otherwise zero.
Profitability
Return on Assets: One point if it is positive in the current year otherwise zero.
Operating Cash Flow: One point if it is positive in the current year otherwise zero.
Change in Return of Assets: One point if it is higher in the current year compared to the previous year otherwise zero.
Accruals: One point if Operating Cash Flow/Total Assets is higher than Return on assets in the current year otherwise zero.
Leverage, Liquidity and Source of Funds
Leverage (long-term) ratio: One point if the ratio is lower this year compared to the previous year otherwise zero.
Current ratio: One point if it is higher in the current year compared to the previous one otherwise zero.
Number of Shares: One point if no new shares were issued during the last year
Various other factors should also be considered while evaluating companies based on these criterias as companies in particular industry will face common challenges and issue and will not able to perform in particular evaluation matrix. Piotroski also highlighted such subjectivity stating that an increased leverage for a financially distressed company would have greater negative implications rather than the company which is not financially distressed.
An investor can use the F score tool to analyse the performance of his stocks in his portfolio and compare it the other peers in the Industry or other stocks in the portfolio.
We have evaluated Reliance Industries Limited using the F-score Model and the results are as under:
Even though a score of 6 for Reliance Industries Limited puts it in the range of moderate category the reasons for the same could be attributed to the year end inventory valuations which would have been affected due to the fluctuations in the oil prices globally and the COVID-19 situation before us.
You too can do your own analysis. We have provided the Piotroski's 9 F-Score Value Calculator below so that you can evaluate the company of your own choice.
Editors Note: This Value Investing philosophy is similar to our Coffee Can Portfolio. Read about it here.
