Value stocks

Find value stocks based on their ‘scores’ | by Dimitrios Gourtzilidis | August 2022

One of the easiest ways to check a company’s financial health is to analyze it based on its scores.

In this article, I will analyze the different scores that check the fundamental health of a company.

Photo by Wonderlane on Unsplash

Joseph D. Piotroski, an American professor of accounting at Stanford University, specializing in accounting and financial reporting issues, is the creator of the Piotroski F-Score.

He earned his bachelor’s degree in accounting from the University of Illinois, his master’s degree in finance from Indiana University, and his Ph.D. in accounting from the University of Michigan.

Professor Piotroski published his article “Value investing: Using historical financial statement information to tell winners from losersin 2000 in the Journal of Accounting Research.

The F-Score examines a company according to nine criteria, with 0 being the worst and 9 being the best. The portfolio that shorted companies with a low F-score and went long in companies with a high F-score averaged 23% per year from 1976 to 1996.

The score examines measures of a company’s profitability, funding, and efficiency. The company receives one point for each of the following criteria that it meets.


  1. If the return on assets (ROE) is positive for the current year.
  2. If the operating cash is positive for the current year.
  3. If the return on assets (ROA) is higher than that of the previous year.
  4. If the operating cash flow / Total assets (adjustment accounts) is higher than the ROA.

Leverage, liquidity and source of funds:

  1. Whether leverage (long-term ratio) is lower than the previous year.
  2. If the Current Ratio is higher than that of the previous year.
  3. If the number of shares remained the same compared to the previous year.

Operational efficiency:

  1. If the Gross margin is higher than that of the previous year.
  2. If the asset turnover rate is higher than that of the previous year.
My F-Score analysis of Apple.

As with any fundamental indicator, the F-Score of individual stocks should be compared to industry and sector average.

Messod Daniel Beneish, an accounting professor at Indiana University, is the creator of M-Score, a probabilistic model that tests whether a company is manipulating its reported earnings.

He obtained his MBA in accounting, economics and finance and his doctorate. in Accounting and Economics from the University of Chicago.

The M-Score formula is as follows (click to enlarge).

The basic notion of the calculation is to include this period and the financial figures of the previous periods. I have indicated in the list below the figures relating to the previous period. When no additional information is provided, you can safely assume that a number refers to the current financial period.

  1. Days in Receivables Sales Index (DSRI) = (Net Claims / Sales) / (Previous Period Net Claims / Previous Period Sales)
  2. Gross Margin Index (GMI) = [(Sales from previous period — Cost Of Goods Sold from previous period) / Sales from previous period] / [(Sales — Cost Of Goods Sold) / Sales]
  3. Asset Quality Index (AQI) = [1 — (Current Assets + Property Plant & Equipment+ Securities) / Total Assets] / [1 — ((Current Assets from previous period + Property Plant & Equipment from previous period + Securities from previous period) / Total Assets from previous period)]
  4. Sales Growth Index (SGI) = Sales / Sales of the previous period
  5. Depreciation index (DEPI) = (Previous Period Depreciation / (Previous Period Fixed Assets, Plant and Equipment + Prior Period Depreciation)) / (Depreciation / (Previous Period Fixed Assets, Plant and Equipment + Depreciation))
  6. Sales General and Administrative Expense Index (SGAI) = (Selling, general and administrative expenses / Sales) / (Selling, general and administrative expenses of the previous period / Sales of the previous period)
  7. Leverage index (LVGI) = [(Current Liabilities + Total Long Term Debt) / Total Assets] / [(Current Liabilities from previous period + Total Long Term Debt from previous period) / Total Assets from previous period]
  8. Total accrued liabilities to total assets (TATA) = (Revenue from Continuing Operations — Operating Cash Flow) / Total Assets

Edward I. Altman, American professor of finance at New York University, is the developer of the Z-score, a method for predicting the likelihood of a company going bankrupt in the next 2 years.

Professor Altman (b. 1941) earned his bachelor’s degree in economics from City College of the City University of New York, as well as his MBA and Ph.D. in finance from the University of California at Los Angeles (UCLA). His teaching focused on “Bankruptcy and Reorganization” and “Credit Risk Management”.

He published his articlePredicting corporate financial distress: revisiting the Z-score and Zeta modelsin 1968. When tested, the model has an accuracy of about 80% to 90%.

The model formula is as follows:

X variables contain values ​​of:

  1. Working capital (current assets-current liabilities) / Total assets
  2. Retained Earnings / Total Assets
  3. Earnings before interest and taxes (EBIT) / Total assets
  4. Equity Book Value (Common Shares + Treasury Shares + Retained Earnings + Net Income) / Total Liabilities

Lehman Brothers, the company that went bankrupt triggered the 2008 financial crisis, had a Z-Score of 0.29 4 years before it went bankrupt.

You can find more details about the spreadsheet presented in the article at this link. Please share your thoughts with me.