Piotroski score

Cheap stocks are not always good stocks. Some are cheap because the market has correctly priced in a weak balance sheet. The Piotroski score is a quick check on that.

It is a single number, taken from a firm's own financial statements. It flags whether a statistically cheap company is actually sound enough to be worth buying.

It was devised by Joseph Piotroski, an accounting professor at the University of Chicago. It feeds into one specific step of the workbook's fusion investing process. It does not stand alone as a complete strategy.

The workbook's footnote: "The Piotroski score is a discrete score between 0-9 that reflects nine criteria used to determine the strength of a firm's financial position. The Piotroski score is used to determine the best value stocks, with nine being the best and zero being the worst. The Piotroski score was named after Chicago Accounting Professor Joseph Piotroski, who devised the scale, according to specific aspects of company financial statements."

In the workbook's three-step fusion investing process, the Piotroski score does its work in Step II: after Step I screens the stock universe on value measures — P/E, price-to-book (P/BV) and price-to-sales (P/S) — Step II filters the value-cheap survivors further on fundamental strength, using profitability, leverage and efficiency parameters such as the Piotroski score, both historically and against earnings forecasts. Only stocks that clear this fundamental filter go on to Step III, where they are checked for price momentum before being added to the portfolio.

Illustrative figures — the workbook does not enumerate the nine underlying criteria. A fund manager runs a value screen on the mid-cap universe and shortlists two companies with similarly low P/E and P/BV ratios: Bharat Steel Ltd and Konkan Textiles Ltd.

Running Step II of the fusion process, Bharat Steel scores 8 out of 9 on the Piotroski scale — improving profitability, falling leverage, and better operating efficiency over the period assessed. Konkan Textiles scores 2 out of 9 — despite the cheap headline multiples, its statements show deteriorating margins and rising debt. Bharat Steel proceeds to the momentum screen in Step III; Konkan Textiles is dropped at Step II, before momentum is even considered, because a cheap stock with a weak balance sheet is a candidate to stay cheap, not to re-rate.

Chapter 14, section 14.4 (Fusion Investing), places the Piotroski score inside Step II of the value-growth-momentum framework. Expect a question naming the 0–9 range and its inventor, and a scenario question testing whether the candidate understands it filters for fundamental strength after a value screen, not as a standalone valuation tool.

• The score runs 0 to 9, with 9 the strongest — a candidate who reverses the scale (assuming lower is better, as with a risk score) will answer wrongly.
• It is Step II of a three-step process, not the whole strategy. A high Piotroski score alone does not put a stock in the portfolio — it still has to clear the earlier value screen and the later momentum screen.
• Named after Joseph Piotroski, not Eugene Fama or Harry Markowitz — both names appear elsewhere in the same chapter and the previous one, and the exam tests whether the candidate keeps the attributions straight.
• The workbook does not list the nine specific line-item criteria — do not answer with an invented list of ratios if asked to name them.