Is this company financially strong or at risk?
The Piotroski Score is a simple yet powerful tool that helps investors assess a company’s financial health using nine key criteria. Developed by Professor Joseph Piotroski, this score evaluates factors like profitability, liquidity, leverage, and efficiency to highlight financially sound companies—especially among undervalued stocks.
Each company is scored from 0 to 9, with higher scores signaling stronger financial stability and lower scores indicating potential risk. Widely used by value investors, the Piotroski Score offers a clear, data-driven way to identify solid investment opportunities in markets where traditional growth metrics may fall short.
What you’ll learn
Introduction to the Piotroski Score
Accounting professor Joseph Piotroski introduced in 2000 the Piotroski Score which functions as a financial scoring methodology that rates corporate financial health through fundamental criteria. Through its initial purpose of finding stocks that sold at below their intrinsic worth the Piotroski Score functions today as a method to distinguish businesses with solid financial foundations from those operating at risk. Value investors depend on this score to detect hidden investment potential in undervalued stocks because it works best in market environments where growth patterns remain obscure.
The Piotroski Score uses nine criteria grouped into three sections to evaluate profitability and leverage/liquidity and operating efficiency. A company receives one point per financial benchmark that it satisfies according to each of the nine scoring criteria. This results in total scores ranging between 0 and 9. A financial score of 7 to 9 demonstrates strong financial stability in businesses while scores from 0 to 3 point toward financial instability or restricted growth potential. These financial categories serve to create a complete evaluation of company standing by assessing profitability performance alongside debt management and operational enhancement capabilities.
Here’s how the Piotroski F-Score categorizes financial strength:
Piotroski F-Score chart showing financial strength from weak (0-3) to strong (7-9).
The Piotroski Score evaluates companies through historical financial data instead of using speculative market predictions thus providing investors with concrete fundamental insights. The score helps investors locate firms with proven financial performance indicators including rising profitability and stable cash flow together with debt management practices. When markets become resistant to swift expansion the Piotroski Score helps investors identify companies with strong financial characteristics even though these businesses are not widely popular or considered undervalued. The popularity of this metric enables investors to strengthen their value-based investment approach by making assessments about companies that may succeed during market volatility.
Components of the Piotroski Score
The Piotroski Score analyzes nine financial metrics which fall under three main categories: profitability, leverage/liquidity and operating efficiency. Financial indicators demonstrate to investors how well or poorly a company performs.
The profitability category contains four indicators that examine how well a company produces revenue and maintains its operations. The confirmation of profitability stems from positive net income, while positive operating cash flow demonstrates that the business has sufficient financial resources to sustain operations. When ROA increases from one year to the next, it indicates the company is using its resources more efficiently. When operating cash flow surpasses net income, the company shows that actual cash flow supports financial statements, minimizing the risk of accounting manipulation. A strong free cash flow yield further reinforces financial health, signaling that the company generates ample cash relative to its value.
This category evaluates both debt management practices and financial flexibility of the company. The stability and control of debt levels represented by a lower or steady long-term debt ratio becomes essential during market uncertainties. A rising current ratio demonstrates better liquidity capacity that allows the company to fulfill its short-term payment obligations. Equity issuance absence demonstrates that the company does not need to sell additional shares to acquire funds while preserving financial stability.
The operating efficiency category analyzes how companies handle their operational management. The increase in gross margin demonstrates better profitability because the company executes effective cost management and pricing approaches. A rising asset turnover ratio shows that the company executes its assets efficiently to produce revenue thus demonstrating operational effectiveness.
The Piotroski Score uses nine financial indicators to establish a systematic data-based assessment method for analyzing company financial performance. The Piotroski Score enables investors to locate solid fundamental companies while excluding weak financial entities which makes it a useful instrument for seeking dependable investment possibilities.
Significance of a High Piotroski Score
The Piotroski Score becomes high when a company shows strong financial health and sound operational performance, with scores approaching the maximum of nine points. A high Piotroski Score indicates that the organization excels in profitability, leverage control, operational efficiency, and liquidity management, reflecting sound financial practices. Investors often analyze 10-K reports to assess these factors, as they provide a comprehensive breakdown of earnings, cash flow, and debt management. A high Piotroski Score serves as a positive signal, indicating that a company maintains earnings stability, runs operations efficiently, and manages debt responsibly. Long-term and value investors find these traits appealing, as they suggest sustainable growth in undervalued stocks.
Companies with high Piotroski Scores demonstrate stable earnings and positive cash flow because these elements form the basis for funding growth and economic survival. A company demonstrates financial independence through its high profitability levels measured by net income and return on assets which provides additional security for its operations.
Businesses having high Piotroski Scores tend to attract investors because they believe these firms represent hidden value opportunities. Value investors specifically monitor these high scores in companies which the market fails to notice especially when these companies maintain low price-to-book ratios. The operational metrics incorporated in the Piotroski Score help investors identify profitable companies that effectively utilize their assets to become more resistant to market competition.
Investors benefit from a Piotroski Score with high values because it delivers an all-encompassing picture of how stable and operationally strong a company remains. This comprehensive assessment helps investors understand its potential growth and resilience characteristics. The Piotroski score functions as a dependable indicator for investors to uncover stable businesses among potential undervalued opportunities with profitable and lower-risk investment prospects.
Analyzing the Piotroski Score
Through Piotroski Score assessment investors gain crucial information about how well a company performs financially which enables them to understand its present condition and future potential. A Piotroski Score consists of nine specific financial criteria where each positive signal equals one point and generates a score between zero and nine. The Piotroski Score demonstrates strong financial health and operational efficiency when it reaches seven to nine points. Value investors along with investors who favor stable investments find the company attractive because it fulfills the standards for profitability and efficient asset utilization while demonstrating stable or improving debt management.
Financial performance of a company falls into the average range when its Piotroski Score reaches values between four to six. Although the score does not possess all the advantages of a high-score company it reveals basic principles of sound financial management. The company demonstrates positive earnings and operational efficiency although its cash flow and leverage management areas require improvement. Investors see mid-score companies as having improvement potential and growth opportunities yet they carry higher risks compared to high-score companies.
The financial indicators of companies with scores between zero and three typically demonstrate weak points alongside potential dangerous factors. Companies with these score indicators struggle to handle declining profits and poor cash flow and excessive leverage which reduces their ability to survive market downturns. Individuals who examine low-scoring companies need to act with caution because these indicators might show financial weaknesses that could harm the company’s stability.
The Piotroski Score provides investors with a swift but thorough assessment of business health which helps them determine stock compatibility based on their willingness to take risks and their investment goals. The rating system assists investors by allowing them to perform swift assessments and choose businesses that match their investment approach especially for finding reasonably priced stocks with solid operational foundations.
Real-World Application
The Piotroski Score acts as an efficient measure to assess financial health based on Build-A-Bear Workshop, Inc. (NYSE: BBW) data. Early in 2025 Build-A-Bear Workshop received a Piotroski Score of 8 which indicates robust financial position. Investors employ this metric as an evaluation tool to examine profitability and leverage/liquidity and operating efficiency which provides them insights about a company’s overall strength.
The profitability metrics of Build-A-Bear Workshop show positive return on assets which indicates effective earnings generation. Operating cash flow at the company remains positive because its fundamental business operations produce enough financial resources to maintain business operations. The operating cash flow exceeds net income which demonstrates that actual cash supports the recorded earnings thus reducing financial manipulation risks. Better cost control and pricing strategies are demonstrated through the improved gross margin.
Build-A-Bear Workshop’s stock performance reflects its strong financial standing:
A multi-year stock chart of BBW, showing its price trends leading into 2025.
Build-A-Bear chose to lower its long-term debt levels as part of its financial discipline approach to gain leverage and improve liquidity. The company has enhanced its current ratio to demonstrate better capability in fulfilling short-term debt obligations. The company has maintained its shareholder value through a decision to avoid issuing new stocks while demonstrating financial stability.
The company has enhanced its operating efficiency by generating increased revenue from each unit of its assets through its asset turnover ratio. The company demonstrates effective stock management and demand forecasting through improved inventory turnover numbers. The perfect Piotroski Score of 9 positions Build-A-Bear as an excellent investment opportunity for value investors.
Alongside Build-A-Bear Entertainment there are two other companies with high Piotroski Scores: Crown Holdings Inc. (NYSE: CCK) and Comcast Corporation (NASDAQ: CMCSA) who show strong profitability together with sound debt management and operational efficiency. The Piotroski Score enables investors to locate financially secure businesses which provide essential knowledge for developing long-term investment plans.
Evaluating the Reliability of the Piotroski Score
The Piotroski Score operates reliably to measure financial health mainly for value investors. The Piotroski Score receives scientific validation through various scholarly investigations which demonstrate its strength for locating bargain stocks holding robust financial operations. Professor Joseph Piotroski revealed through his primary research that businesses achieving higher scores near nine demonstrated better market performance than their industry rivals. The Piotroski Score revealed its greatest performance advantages in stocks with lower price-to-book ratios because it indicated potential financial recovery or growth potential.
The Piotroski Score demonstrates value in market performance assessments for manufacturing and mature industrial sectors because it effectively identifies companies with sound fundamentals that indicate growth potential and business resilience. The Piotroski Score proves useful for investors because it enables them to select firms with lower risk of financial distress. Fundamental analysis performed with the Piotroski Score leads investors to experience less financial loss particularly when they select companies which consistently earn high scores.
The Piotroski Score performs efficiently for detecting healthy financial companies yet it struggles to anticipate major market fluctuations as well as industry-specific business dynamics. The score shows insufficient ability to detect growth potential within high-tech sectors because innovation surpasses conventional financial metrics. The Piotroski Score functions as a dependable tool within investments that use value-oriented and conservative approaches because it produces results that match fundamental financial health measures. The reliability of this tool can be improved by linking it with additional analysis methods which expands its usefulness across different market environments.
Piotroski vs. Altman Z-Score
The Piotroski Score evaluates company health with low price-to-book stocks while Altman Z-Score evaluates financial strength among all companies. These metrics operate in different financial contexts. The Piotroski Score by Professor Joseph Piotroski functions to evaluate financial strength in companies with low price-to-book ratios by identifying value stocks which might recover or grow. The measurement system uses nine criteria to evaluate a company’s profitability and leverage and liquidity and operating efficiency for fundamental health assessment purposes. The score finds wide acceptance among investors who follow value strategies because it allows them to discover stocks with strong financial fundamentals.
Edward Altman created the predictive Altman Z-Score as a model which determines company bankruptcy risk during a two-year timeframe. The score generates a unified indicator of financial health by processing five ratios which evaluate liquidity and profitability and leverage and solvency and activity to determine the distress level of a company. The Piotroski Score exists to find value opportunities but the Altman Z-Score focuses on risk evaluation by helping identify companies at risk of default.
The Altman Z-Score categorizes companies based on their financial distress risk:
Altman’s Z-Score model ranks companies by bankruptcy risk, from distress to safe zones.
The assessment methods between these two scores vary because they serve different financial evaluation purposes. The Piotroski Score serves long-term value investors by finding stable or improving companies yet the Altman Z-Score best assists lenders and creditors who need short-term financial stability assessments. Investors who merge insights from these metrics will obtain an enhanced understanding of business growth potential together with current financial stability for better investment choices.
Advantages of the Piotroski Score
Through its scoring system investors now have an insightful means to locate promising stocks among organizations with strong financial bases. Because of its functionality the Piotroski Score reveals undervalued investment opportunities in stock markets that typically ignore companies with low price-to-book ratios. The Piotroski Score evaluates both profitability and leverage together with liquidity and operational efficiency to identify financially strong companies maintaining growth potential despite their low valuation. The analytical method allows investors to locate solid fundamental companies which other investors would fail to detect through normal assessment.
The price-to-book (P/B) ratio helps investors assess a company’s market valuation relative to its book value:
Formula for the price-to-book (P/B) ratio, calculated by dividing market capitalization by the book value of equity (BVE).
The Piotroski Score delivers a simple yet thorough evaluation method that simplifies fundamental analysis. The nine-point scoring system allows investors to efficiently understand company financial health, regardless of expertise level. Portfolio screening benefits from this structured approach, making it easier to process numerous stocks, particularly in unstable sectors. Investors focusing on high Piotroski Scores should also consider book value per share, which helps assess a company’s intrinsic worth relative to its stock price, further refining investment decisions for stability and growth potential.
Risk management benefits strongly from the Piotroski Score system. Investors choose companies with strong financial fundamental scores to avoid risky investments in unstable firms. The use of Piotroski Score helps investors protect their investments from negative events while achieving better portfolio results. A Piotroski Score serves as an effective system to identify substantial investment opportunities which combine revenue growth with sound financial health while controlling business risks for building stable profitable investment portfolios.
Limitations of the Piotroski Score
Investors should use Piotroski Score data with caution because this assessment tool for financial strength exhibits significant restrictions in its application. The Piotroski Score solely depends on historical financial data while ignoring potential business growth prospects and the macro environment. The tool’s reliance on past performance prevents it from detecting new factors such as industry trend changes, economic conditions, and strategic business developments. The high Piotroski Scores of some companies do not guarantee superior future investment performance, especially when these businesses demonstrate weak growth potential or face adverse macroeconomic shifts.
The main weakness of the score lies in its inability to distinguish between industries or business models. The Piotroski Score delivers its best results when applied to companies operating in established sectors whose business stability is simple to measure. High R&D expenses in technology or pharmaceutical industries may lead the Piotroski Score to wrongly penalize companies thereby producing incorrect strength evaluations. The Piotroski Score produces unreliable results for cyclical companies during market downturns because sound long-term prospects do not translate into high scores.
R&D investments play a crucial role in innovation-driven industries but can skew financial metrics like the Piotroski Score:
R&D includes patents, trademarks, IP, and technological systems, impacting company valuation.
Soaking exclusively in Piotroski Score data creates investment challenges because it only selects value stocks that demonstrate financial health. Companies that prefer reinvesting earnings rather than showing high profitability obtain low scores even though they possess strong growth potential. The Piotroski Score works effectively to identify undervalued companies, yet it needs to be combined with multiple metrics and qualitative evaluations to gain a complete picture of business potential. Incorporating real-time trade alerts alongside growth analysis and investor sentiment tracking can enhance decision-making by keeping investors informed of market shifts as they refine their strategies. The Piotroski Score becomes even more effective for portfolio management when paired with tools that assess industry conditions, growth outlooks, and market sentiment.
Conclusion
The Piotroski Score operates as an essential assessment method for investors who need to evaluate corporate financial stability when they practice value investing. The Piotroski Score produces a basic and meaningful evaluation of fundamental health through its assessment of profitability metrics and leverage ratios and liquidity levels and operational efficiency measurements. The Piotroski Score provides clear insights that enable investors to exclude financially unstable companies which present undervalued appearances.
The Piotroski Score delivers valuable information but requires combination with other assessment methods. Since it relies on historical information the F-Score cannot predict upcoming business dynamics or industry-specific factors affecting company performance. The Piotroski Score requires additional investment analysis together with other evaluation tools for investors examining innovative or cyclically volatile businesses.
The inclusion of Piotroski Score data into investment evaluation provides investors with holistic understanding of corporate health. The Piotroski Score provides better investment decisions when it is combined with growth metrics and qualitative assessments and market trend analysis to create a stronger diversified investment portfolio. The Piotroski Score serves investors as a strong tool to discover undervalued opportunities together with maintaining financial discipline in their investment strategies.
Understand Piotroski Score: FAQs
How Often Should the Piotroski Score Be Calculated for an Investment?
The Piotroski Score needs key financial statements like income statement and balance sheet to compute it so it is done on an annual basis. Investors monitoring investments should reassess the Piotroski Score semi-annually or quarterly to track financial health changes of their holdings especially during market volatility.
Can the Piotroski Score Predict Future Financial Distress or Bankruptcy?
Financial strength serves as the purpose of the Piotroski Score instead of identifying bankruptcy conditions specifically. The Piotroski Score does not match the extensive predictive capabilities of bankruptcy-focused approaches such as the Altman Z-Score even though poor scores show signs of financial trouble. Investors can use the Piotroski Score as an initial warning signal to initiate risk profile reevaluation of their companies.
How Does the Piotroski Score Integrate Into a Diversified Investment Strategy?
The Piotroski Score functions as a tool for investors to discover reliable companies that belong to select business sectors enhancing portfolio stability. Investors who combine Piotroski Score analysis with different sectors’ growth metrics and dividend yield assessments will achieve better control of their risk-reward balance. Using Piotroski Score allows value investors to identify solid financial companies that match long-term diversified investment needs despite their current undervalued status.
Are There Any Industries Where the Piotroski Score Is Particularly Effective or Ineffective?
Traditional manufacturing and retail industries show maximum performance from the Piotroski Score because this metric primarily measures profitability alongside operational efficiency and financial stability. The Piotroski Score becomes less accurate when applied to industries with fast growth characteristics such as technology or biotech because research and development costs and rapid expansion cause companies to score poorly despite potential growth potential. The Piotroski Score within cyclical industries experiences changes that might be due to economic cycles instead of lasting financial success.
How Can Investors Integrate the Piotroski Score With Other Financial Ratios?
The Piotroski Score achieves better analytical power when investors add ratios such as the price-to-earnings (P/E), debt-to-equity and current ratios to their evaluation process. The Piotroski Score becomes more effective for market analysis when used together with P/E ratio values because it reveals how financially sound undervalued stocks really are. The combination of Piotroski Score with liquidity ratios leads to better company risk assessment which enhances overall risk management systems.
