How to evaluate a company based on the Piotroski 9 step method

Hello ladies and gents,

Today I’m going to show you a great scoring method you can use to develop an idea of the financial stability and growth of a company.

It is designed to find undervalued companies that are recovering.

Joseph Piotroski is an accountant who became famous for this 9 step method he coined “the F score”. His method has a good track record and was shown to perform a 23% annual return from 1976 to 1996! More information can be found in his paper titled Value Investing: The Use if Historical Financial Statement Information to Separate Winners from Losers.

Before we begin the prerequisites for the scoring method is that you should invest in the bottom 20% of these companies that scores a 7,8,9 based on their P/B ratio. So lower the P/B ratio the better.

Without further ado here is the 9 things to look for according to Joseph Piotroski and his ‘F-Score’ method.

1. (ROA) Return on Assets = Net income / Total Assets

1 point if this ratio is positive

2. (CFROA) Cash flow return on assets = Operating cash flow / Total Assets

1 point if this ratio is positive

3. ROA (Current Year) > ROA (Last year)

1 point if current year higher than previous year

4. Quality of Earnings. Find difference between CFROA and ROA for current year

1 point if CFROA > ROA

5. (Long term debt / Total Assets (current year))/ (Long term debt / Total Assets (Last year))

1 point if Current Year ratio is lower than last years ratio

6. (Total Current Assets / Total Current Liabilities (Current year)) / (Total Current Assets / Total Current Liabilities (Last Year))

1 point if Current year ratio is higher than last years ratio

7. Compare current years shares outstanding to last years shares outstanding. (Shares should stay the same! They should NOT be issuing more shares)

1 point if there were NO new shares issued

8. (Current year Gross Profit / Revenue) / (Last years Gross Profit / Revenue)

1 point if Current years ratio is higher than last years

9. (Current year Revenue / Total Assets) / (Last years Revenue / Total Assets)

1 point if Current year ratio is higher than last years ratio

If Total score adds up to 7, 8, or 9 then it’s Good

If Total score adds up to 0, 1, 2, 3 then it’s Bad scores

Remember, we also want our P/B ratio as low as possible. Some people believe the best time to sell is when the P/B goes over 1.1 but I haven’t found statistical evidence pointing to this being the best method of approach.

Have fun! And let me know if you have any questions!

Submitted July 31, 2018 at 01:13PM by Goal1
via https://ift.tt/2mYrnMH

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