Does the cash from operations exceed net income before extraordinary items? If yes, award 1 point, if not, no points.
Capital Structure (3 points)
Direction of Leverage
Did the long term debt to total assets ratio increase or decrease from the year before? If leverage decreased award 1 point; if it increased, no points.
Direction of Liquidity
Did the current ratio (current assets divided by current liabilities) increase or decrease from the prior year? If it increased, award 1 point; if it decreased, no points.
When a company issues stock it dilutes the present shareholders stake and may indicate the company is unable to raise sufficient capital from operations. If the company has not issued stock in the past year award 1 point; if it issued stock, 0 points.
Operating Efficiency (2 points)
Direction of Margin
If the gross margin ratio has increased (year over year) that is a positive sign, award 1 point. Falling margins would be a warning sign, no points awarded.
Direction of Asset Turnover
An increase in asset turnover (sales divided by assets at the beginning of the year) from one year to another would indicate greater efficiency. Award 1 point for a higher asset turnover ratio than the previous year; 0 points if it has decreased.
Using the Piotroski F-Score Stock Screen
There is no single magic formula that will give you a certain answer to whether you have chosen the right stock. The Piotroski F-Score has a proven record of increasing the probability of eliminating weak companies and identifying the stocks of companies with good fundamentals.
The DVB Dividend Analyzer uses the Piotroski F-Score in its formula as part of its Dividend Safety Score. One of the aspects I like about the Piotroski score is that it is sensitive to company trends. We want an early warning to potential problems when it comes to dividend safety. This is just one of several valuable approaches to using the Piotroski F-Score.
This article was republished with permission from Arbor Investment Planner.