November 18, 2021

Where the Piotroski Financial Score is weak

The Piotroski Financial Score was published in 2004 by Stanford University professor Joseph D. Piotroski. It found a return of 21% per year for the return series of the stock boom years from 1972 to 2001. We discussed the F-Score method in the online coffee chat of 12 November 2021 and noted where the weaknesses of the approach lie from the perspective of the Obermatt method. Three points were discussed:

  1. Market values are not taken into account. However, it does matter how expensive the company is in relation to the financial facts and how easy it is for the company to refinance its debt. Obermatt uses market values wherever they are more reasonable than accounting figures.
  2. Growth is only just taken into account in two key figures. In the return on net assets (ROA) and the gross margin. Both ratios are ambiguous growth ratios. ROA can increase if profit remains constant and invested capital is depreciated. Gross margins can rise if products with below-average margins are simply no longer sold (although they also contribute to profits).
  3. Several of the ratios are ambivalent. It is not necessarily good if debt decreases. A company with good future prospects finances itself better with new debt than with new equity. The current ratio is also ambivalent and can hardly always be improved, even by good companies. An increasing capital turnover can mean that the company simply does not invest any more. This is also not a good sign.

Watch the chat to better understand the weaknesses of the F-Score.

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