The automated stock analysis Excel sheet (version 8) now calculates thePiotroski Score for the last 9 financial years for Indian stocks.
In January 2002, Prof. Joseph Piotroski wrote a paper titled, Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers which detailed a method of buying stocks based on 9 balance sheet based criterion. It is now known as the Piotroski Score or the Piotroski F- Score. He presented a back-testing study which supported the utility of the method.Value investors could have increased their returns by 7.5% if they had used this method 20 years ago.
Here is the list of criteria used to calculate the Piotroski Score. This and the calculation in the sheet is based on Building a Financial Model
Piotroski Score Metrics
- Return on Assets (ROA): Net income relative to (divided by) total assets. One point if positive. Zero if negative.
- If this financial years ROA is greater than previous financial years ROA, one point. Else zero.
- Cash flow return on assets (CFROA): Operating cash flow relative to total assets. One point if positive. Zero if negative.
- If CFROA is greater than ROA, one point. Else zero. This measures the quality of earnings.
- Leverage = long-term debt relative to total assets. If leverage has decreased this financial year, one point, else zero.
- Liquidity. The Current ratio is current assets divided by current liabilities. One point if last reported current ratio is greater than that for the previous financial years. Else zero.
- One point if the shares outstanding has remained the same or decreased. Else zero.
- Asset turnover: Total sales relative to total assets. One point if this is higher than that for pervious financial year. Else zero.
- Gross margin: Gross profit relative to sales. One point if higher than that for previous financial year.
With these metrics a company can be given a Piotroski Score. Higher the score, better the strength of the company and confidence it its operation.
Version 8 of the freefincal stock analyzer computes the Piotroski Score using 10-year financials from Morning Star India. Thus the score is obtained for the last 9 financial years.
Here is an example (click to enlarge):
Other features of the freefincal stock analyzer
The automated stock analyzer
- pulls annual (standalone/consolidated) and quarterly financials from Value Research online
- pulls financials from morningstar and analyzes them, adjusted
- pulls adjusted stock price history from money control, and
- calculates intrinsic value six different ways!
Valuation models available:
1) Price Multiple Model
2) Sustainable Growth Rate
3) Book Value Growth Rate (Buffett’s approach to valuation)
4) Discounted Cash Flow (DCF)
All necessary links for learning each valuation model is provided in the Excel sheet itself. Following the flow of information in the sheet, a new investor should be able to understand how the valuation is done.
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