How the Piotroski Score Identifies Strong Businesses in the Stock Market

One of the biggest challenges when determining whether or not to invest in a company is determining each company’s financial strength. Enter the Piotroski Score; this easy rating scale helps you learn a company’s strength.

Value investors love this rating scale as it gives you a good initial insight into all aspects of the financial statements. It utilizes the income statement, balance sheet, and cash flow statement.

As we will see, the Piotroski score is a simple device to seek out great, undervalued companies.

The Piotroski score helps you find profitable companies with improving margins, don’t employ any accounting tricks and have strong balance sheets.

In today’s post, we will learn:

  • What is the Piotroski Score?
  • What is the Piotroski Criteria?
  • Breakdown of Related Terms
  • Piotroski Score in Action

Let’s dive in and look at what the PIotroski Score is and how we put it to use.

What is the Piotroski Score?

The Piotroski Score varies from 0 to 9, with 9 being the peak score possible. Based on the nine criteria used to determine a company’s financial position’s strengths, this score uses this range to help find the top companies.

Named after Chicago Accounting Professor Joseph Piotroski, the Piotroski Score uses the companies’ different financial multiples.

The focus is on each company’s accounting results, specifically over the last few years. We award each company a point for every criterion met, and every metric not met is awarded a zero.

In the end, we add up the points to determine which company is the best value stock.

Sounds pretty easy, huh?

What is the Piotroski Criteria?

Let’s break down the criteria into its distinct segments.

Next, a breakdown of the scoring and how it works.

A company that achieves a score of 8 or 9 is considered a great value. On the other hand, if a company records 0-2, it is considered a mediocre company with weak financials.

Breaking Down Terms Used in the Piotroski Score

Let’s peek at some of the terms and break them down.

  • Return on Assets – the ROA shows us how profitable our company’s assets are in creating revenue. Learn more about the formula for ROA here.
  • Operating Cash Flow – refers to the cash from normal business operations. It is the cash before any financing or investment activities. We will find this in the statement of cash flows.
  • Long-term debt – debt that is due longer than 12 months in the future — the debt either owed to bondholders or banks, some companies issue to debt to fund growth or payback other debt. Long-term debt is listed below the current liabilities section in the balance sheet.
  • Current Ratio – we use this ratio to give you an idea of its ability to pay back short-term liabilities with the company’s short-term assets. We find all the data on the balance sheet.  A great indicator of a company’s liquidity is the current ratio.
  • Gross Margin – the ratio is the difference between revenue minus cost of goods sold divided by the company’s sales. Expressing the margin as a percentage, we look for a higher number. The more profit a company keeps from each dollar of sales, the better positioned it is to cover its other costs and debt payments.
  • Asset Turnover Ratio – an efficiency ratio that measures a company’s ability to create sales from its assets by comparing net sales to average total assets. The asset turnover ratio helps us understand how the company generates revenues from its assets, and how efficient the process.

Piotroski Score in Action

Okay, we have spent some time looking at what the Piotroski Score is, what some of the terms are, and why it exists.

Our first guinea pig is Intel (INTC), a semiconductor leader with a $186.01 billion market cap, as of November 9, 2020, is $47.12.

On another note, all numbers will be listed as millions unless otherwise stated.

To begin to put together, we will gather some numbers from the 10-k from 2017. I prefer to use the 10-ks if possible as these numbers are audited if you are more comfortable using the TTM or 10q, to have access to the most up to date numbers, by all means.

To start, we will look at examples of where to find each number:

  • Net Income
  • Cash Flow from Operations
  • Revenue
  • Gross Profit
  • Average Total Assets
  • Total Assets
  • Long-Term Debt & Capital Lease Obligation
  • Total Current Assets
  • Total Current Liabilities

Intel’s Net Income comes from the income statement.

Intel’s Net income = $21,048

Next, the Cash Flow from Operations will come from the cash flow statement.

Cash Flow from Operating Activities = $33,145

Next up is revenue

Intel’s revenue = $71,965

Gross profit will is up next, located in the consolidated statements of earnings. We calculate gross profit as Revenue minus Cost of products (goods) sold. Many companies will list the gross profit, some won’t, but it is a good idea to understand how to calculate.

Generally, the relationship to the cost of goods sold to revenues goes a long way toward profitability. A company that can control its costs has a better chance of profitability.

Gross Profit = $42,140

We calculate the Average Total Assets by adding up five years of Intel’s total assets from five years of 10-ks and then dividing by five.

Next, the balance sheet to locate the total assets. I will illustrate where to find the first year, and then I will pull the others together for us.

Intel’s total assets for 2019 = $136,524

For our five years:

  • 2018 = 127,963
  • 2017 = 123,249
  • 2016 = 113,327
  • 2015 = 101,459

Next, let’s find the average by adding the assets up and dividing by five:

136524 + 127963 + 123249 + 113327 + 101459 / 5

Intel’s Average Total Assets over the five years = $120,504.4

Next, let’s find the total assets at the beginning of 2019 by looking at the total assets from 2018.

Intel’s total assets at the beginning of 2019 = $127,963

Next up, we need to locate the long-term debt and any contractual obligations or leases. We will find long-term debt on the balance sheet directly under the current liabilities section.

We classify long-term debt as any debt that is due longer than twelve months.

Long-term debt = $25,308 + $1,368 = $26,676

Next, let’s find the total current assets, which again are on the balance sheet.

Intel’s total current assets = $31,239

And lastly, we need to locate total current liabilities, returning again to the balance sheet.

Intel’s current liablities for 2019 = $22,310

Now, after gathering all of our numbers, we can start to answer the questions to determine our Piotroski score for Intel.


Q1: Return on Assets

Intel Net Income for 2019, positive at $21,048, score = 1

Q2: Cash Flow from Return on Assets

Intel’s current Cash Flow from Operations,positive at $$33,145, score = 1

Q3: Change in Return on Assets

Compare this year’s ROA to last year’s ROA.

ROA ( 2019 ) = Net income / Total Assets ( Dec 2018)|
ROA = 21048 / 133768
ROA = 0.16%

ROA (2018) = 19338 / 128242
ROA (2018) = 0.15%

Return on assets for 2019 was higher than in 2018, 0.16% to 0.15%, score = 1

Q4: Quality of Earnings

Let’s Compare cash flow from return on assets to return on assets.

Johnson & Johnson’s current net income was $21,048. Intel’s current cash flow from operations was $33,145. So $33,145 is greater than $21,048, CFROA > ROA score = 1


Q5: Change in leverage

Next, let’s compare this year’s leverage, long-term debt divided by average total assets, to last year’s leverage.

Leverage ( 2019 ) = 25308 / 136524
Leverage = 18.53%

Leverage (2018 ) = $25098 / $127963
Leverage = 19.61%

Intel’s leverage for 2019 was 18.53%, and their leverage for 2018 was 19.61%.

Therefore 2019 is lower than in 2018, and Intel’s leverage was lower this year, score = 1

Q6: Change in Working Capital ( Liquidity )

Compare Intel’s 2019 current ratio ( current assets divided by current liabilities ) to 2018’s.

We score +1 if the current year’s ratio is higher and zero if lower.

Current Ratio (2019) = Total Current Assets / Total Current Liabilities
Current Ratio = $31,239 / $22,310
Current Ratio = 1.40

Current Ratio (2018) = $28,787 / $16,626
Current Ratio = 1.73

Intel’s current ratio for 2019 is 1.40, and for 2018 was 1.73. With 2019’s current ratio lower than 2018, score = 0

Q7: Change in Shares Outstanding

Compare the number of shares outstanding to the previous year’s number. If Intel has higher shares outstanding in 2018 than 2019, score one. If Intel has fewer shares outstanding in 2019 than 2019, score zero.

Intel’s shares outstanding in 2019 was 4473.0. Their number of shares outstanding in 2018 was 4701, with more shares issued in 2018, score = 1.


Q8: Change in Gross Margin

Compare 2019’s gross margin to last year’s, and score one if 2019’s gross margin is higher, zero if the gross margin is lower.

Gross Margin (2019) = Gross Profit / Revenue
Gross Margin = $42,140 / $71,965
Gross Margin = 58.56%

Gross Margin (2018) = $43,737 / $70,848
Gross Margin = 61.73%

The gross margin for 2019 was 58.56%, and the gross margin for 2018 was 61.73%, with Intel’s gross margin in 2018 higher than 2019, score = zero.

Q9: Change in asset turnover

Compare Inte’s 2019 asset turnover 2018’s asset turnover ratio.

Score one if this 2019’s asset turnover ratio is higher, zero if the turnover ratio is lower.

Asset Turnover (2019) = Revenue / Total Assets 2018.
Asset Turnover = $71,965 / $127,963
Asset Turnover = 56.24%

Asset Turnover (2018) = $70,848 / $123,249
Asset Turnover = 57.48%

Intel’s asset turnover ratio for 2019 was 56.24%. And the asset turnover ratio for 2018 was 57.48%. The asset turnover ratio for 2019 was lower than the ratio for 2018, score = zero.

Piotroski Scorecard

  • Q1 = 1
  • Q2 = 1
  • Q3 = 1
  • Q4 = 1
  • Q5 = 1
  • Q6 = 0
  • Q7 = 1
  • Q8 = 0
  • Q9 = 0

Total score = 6

A great result would be 7, 8, or 9, with a poor score being 1, 2, or 3.

Intel’s score is 6, which is a pretty good score, with the company improving its score over the last three quarters:

  • Mar20 – 7
  • June20 – 7
  • Sep20 – 7

Overall the Piotroski score illustrates what we probably already know about this company: they are a stable, mature company with strong financials, with growth in the competitive semiconductor sector uncertain.

For giggles, let’s try another, shall we?

Let’s look at AMD, one of Intel’s biggest competitors in the semiconductor world.

AMD has a market cap of $103.20 billion, a P/E ratio of 113.99.

Okay, now that we know a little bit about the company, let’s look at AMD’s Piotroski score.

For this example, I will pull together the information and walk you through the questions. We will gather the numbers from its TTM or year ending September 2020.

  • Net Income = $879 million
  • Cash Flow from Operations = $959 million
  • Revenue = $8,646 million
  • Gross Profit = $3,845 million
  • Average Total Assets = $6,150.2 million
  • Total Assets at the beginning of 2019 = $5,253 million
  • Long-term Debt = $578 million
  • Total Current Assets = $5,500 million
  • Total Current Liabilities = $2,417 million

Q1: Return on Assets

AMD’s current Net Income is positive at $879 million, score = 1

Q2: Cash Flow on Return on Assets (CFROA)

AMD’s current cash flow from operations was positive at $959 million, score = 1

Q3: Change in Return on Assets

AMD’s Return on Assets 2019 = Net Income / Total Assets

ROA 2019 = 879 / 5253
ROA 2019 = 16.73%

Return on Assets 2018 = 209 / 4347
ROA 2018 = 4.81%

AMD’s ROA for 2019 was higher at 16.73% than 2018 at 4.81%, score = 1

Q4: Quality of Earnings

Compare AMD’s CFROA to ROA.

AMD Net Income for 2019 was $879, compared to its current Cash Flow from Operations, $959.

Because AMD’s Cash Flow from Operations was greater than Net Income, 959 > 879, score = 1.

Q5: Change in Leverage

Compare AMD’s 2020 leverage ( long-term debt divided by total average assets ) to 2019’s leverage.

Leverage 2020 = $578 / $6150.2
Leverage 2020 = 9.39%

Leverage 2019 = $1073 / $4837.8
Leverage 2019 = 22.18%

AMD’s 2020 leverage of 9.39% was lower than the leverage of 2019 at 22.18%, score = 1

Q6: Change in Working Capital

Compare AMD’s 2020 current ratio (current assets divided by current liabilities) to 2019’s current ratio.

Current Ratio 2020 = Current assets / Current Liabilities
Current Ratio 2020 = $5500 / $2417
Current Ratio 2020 = 2.28

Current Ratio 2019 = $3912 / $1864
Current Ratio 2019 = 2.09

AMD’s current ratio for 2020 was higher at 2.28 than the 2019 number of 2.09, score = 1

Q7: Change in Shares in Issue

Compare the number of shares outstanding in 2020 to those of 2019.

AMD’s number of shares outstanding is 1215, compared to 2019’s shares available of 1117, with a larger number of shares available this year, score = zero.

Q8: Change in Gross Margin

Compare AMD’s gross margin of 2020 (gross profit divided by sales) to 2019’s gross margin.

Gross Margin 2020 = Gross Profit / Revenue
Gross Margin 2020 = 3845 / 8646
Gross Margin 2020 = 44.47%

Gross Margin 2019 = 2456 / 6023
Gross Margin 2019 = 40.77%

AMD’s gross margin in 2020 was 44.47%, higher than 2019 of 40.77%, with this year’s gross margin higher, score = 1.

Q9: Change in asset turnover

Compare AMD’s 2020 asset turnover (total sales for the year divided by total assets at the beginning of the year) to 2019’s asset turnover ratio.

Asset Turnover 2020 = Revenue / Total Assets at the beginning of the year 2019
Asset Turnover 2020 = 8646 / 5253
Asset Turnover 2020 = 1.65

Asset Turnover 2019 = 6023 / 4347
Asset Turnover 2019 = 1.39

AMD’s turnover ratio for 2020 was 1.65, which was higher than in 2019 of 1.39. With the turnover ratio higher in 2020 than the 2019’s, score = 1.

AMD’s Piotroski Score for TTM (Sep20).

  • Q1 = 1 point
  • Q2 = 1 point
  • Q3 = 1 point
  • Q4 = 0 point
  • Q5 = 1 point
  • Q6 = 1 point
  • Q7 = 1 point
  • Q8 = 1 point
  • Q9 = 1 point

Piotroski Score for AMD 2020 TTM = 8

Remember that a great score is 7, 8 or 9.

The final result is a great score and indicates that AMD is in a good situation financially.

Comparing the different Piotroski scores of competitors is a great way to screen for a stronger financial company. Keep in mind this process is only as good as the data we feed it, and it is only a screening device. After finding a company with strong financials, continue your research process.

Final Thoughts

The Piostroski score is a straightforward way to analyze any stock and determine the overall value.

Setting up the score is lengthy, but it is easy to implement once you gather the data.

As value investors, there are multiple methods for determining any company’s value we are trying to analyze. But using the Piotroski score allows us to touch all the financials of the company. Plus, it gives us great insight into the overall financial strength of the company.

With that, we will wrap up our Piotroksi score discussion.

As always, thank you for taking the time to read this post, and I hope you find something of value on your investing journey.  

If I can be of any further assistance, please don’t hesitate to reach out.

Until next time, take care and be safe out there,


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