Piotroski Score, Suncore Energy
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Piotroski Score for Value Investing
Joseph Piotroski, a professor at the Stanford Business School, became widely known for his paper, “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” The paper explains how to increase investment returns by ranking value stocks from 9 to 0 based on their ability to pass tests of three financial categories. Value stocks, by definition, are companies that are seeing bad times with low investor expectations. Piotroski theorized that if one could find stocks trading cheaply with outstanding fundamental strength, they could increase investment returns.
Piotroski gave a stock one point if it passed each of the following criteria:
- Positive Annual Net Income
- Positive Annual Operating Cash Flow
- Return on Assets has increased from the last year.
- Operating Cash Flow exceeds net income-protection from accounting tricks.
- Long Term debt to Assets ratio decreased from the prior year. If Long term debt is 0 and assets increase, the company also gets the point.
- The Current Ratio has increased from the prior year.
- The shares outstanding is no greater than it was a year ago.
- Annual gross margin exceeds that of the prior year.
- Percent increase in sales is higher than percent increase in total assets.
An example of a company with a high Piotroski score would be Suncore Energy Inc. (NYSE: SU). Suncore is an integrated energy company that produces oil and natural gas in Canada. Information is sourced from Google Finance:
- Positive Annual Net Income-Check (3.829Billion)
- Positive Annual Operating Cash Flow-Check (5.486Billion)
- Return on Assets has increased from the last year-Check, but close-increased by 0.1%
- Operating Cash Flow exceeds net income-protection from accounting tricks-Check
- Long Term debt to Assets ratio decreased from the prior year. If Long term debt is 0 and assets increase, the company also gets the point-Check-decreased by around 3%
- The Current Ratio has increased from the prior year-Nope, it decreased.
- The shares outstanding is no greater than it was a year ago.-Nope-increased by about 6M
- Annual gross margin exceeds that of the prior year.-Check-increased by 10%
- Percent increase in sales is higher than percent increase in total assets.-Yes, sales increased where assets decreased.
Suncore Energy’s Piotroski Score is 7 out of 9, indicating that it represents a strong fundamentally based company ripe for investment. Of course, the Piotroski score is used to identify the viability of value stocks, which have already been identified as cheap (I used SU because it has a P/E of 10), so when using the Piotroski score, do not forget to independently analyze the investment relative to the price of purchase, something not present in the Piotroski score.
Fool Blogger Nikhil Shamapant does not own shares in any company mentioned above and will not execute a trade in this company within the next two trading days.
