The Piotroski Score: What this method for screening stocks tells us and how it is calculated

Joseph Piotroski's method of screening stocks is based on nine parameters. The score awards 1 point for every parameter met. Stocks with scores of 8-9 are considered fundamentally good. Those notching up 0-2 are considered weak. ET explains how it works.

Net income: Total income for year - total expenses for year
What it measures: If the company has made profits during the current year.
Score: 1 if net income is positive, else 0.

Operating cash flow: Add back depreciation to net income. Adjustments also made for changes in account receivables and inventory
What it measures: If a company is able to generate sufficient cash flow to maintain growth.
Score: 1 if operating cash flow is positive, else 0.

Quality of earnings
What it measures: Since operating cash flow is not affected by non-cash items, it is usually higher than net income. Investors need to be careful when reverse happens.
Score: 1 if operating cash flow is more than net income, else 0.

Return on assets: Net income /total assets
What it measures: How well management is employing the company’s total assets to make a profit.
Score: 1 if return on assets in current year is more than previous year, else 0.

Leverage or gearing: Long term debt /total assets What it measures: How much of assets are financed by debt.
Score: 1 if leverage in current year is lesser than previous year, else 0.

Current ratio: Current assets /current liabilities What it measures: The company’s ability to pay back its short-term liabilities with its short term assets.
Score: 1 if current ratio in current year is lesser than previous year, else 0.

Outstanding shares
What it measures: If a company is able to grow its business without diluting equities.
Score: 1 if outstanding shares remained same or came down due to buy back, 0 if it has gone up due to fresh issues.

Gross margin: Gross profit /Sales
What it measures: The percentage of total sales that the company retains after incurring direct costs.
Score: 1 if gross margin in current year is higher than previous year, else 0.

Asset turnover ratio: Total sales /total assets
What it measures: How efficiently a company uses its assets.
Score: 1 if the assets turnover in the current year is higher than previous year, else 0.

Low Piotroski score
Bank of Baroda 1
Bank of India 2
State Bank of India 3

High Piotroski score
Siemens Ltd 6
Exide Industries Ltd 7
ABB India Ltd 8