Signals and definitions
The F-score adds one point for each of nine signals. The tool uses the definitions in Piotroski's 2000 paper: return on assets and operating cash flow scaled by beginning-of-year total assets, the accrual signal as cash flow above return on assets, leverage as long-term debt over average total assets, the current ratio for liquidity, an equity issuance flag, and gross margin and asset turnover for efficiency. Each signal is shown with its measure so a reviewer can follow how the point was earned.
When to use it
Use it as one structured input to analytical procedures, to compare a client with its own history, or to screen a customer or borrower. It pairs with the financial ratio calculator and the current ratio calculator, and a low score is a prompt to look at the going concern indicators.
Limits
It uses historical figures and treats each signal equally, with one point regardless of size. It was built and tested on a sample of high book-to-market firms, and results for other populations, such as service or financial companies, may differ. Reported figures that are themselves misstated give a misleading score. Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the Piotroski F-score?
A score from 0 to 9 built from nine yes-or-no signals in three groups: profitability (return on assets positive, operating cash flow positive, return on assets improving, cash flow above net income), leverage, liquidity and source of funds (long-term debt ratio falling, current ratio rising, no new common equity), and operating efficiency (gross margin rising, asset turnover rising). Joseph Piotroski introduced it in a 2000 Journal of Accounting Research paper on high book-to-market firms.
How is each signal measured?
Return on assets is net income divided by opening total assets, and operating cash flow is divided by opening total assets too. Leverage is long-term debt divided by average total assets. Liquidity is the current ratio. Gross margin is gross profit divided by sales and asset turnover is sales divided by opening total assets. The change signals compare the current year to the prior year, so the calculator needs three year-ends of total assets.
What is a good F-score?
In Piotroski’s study, firms scoring 8 or 9 were classed as high and 0 or 1 as low. A score is a relative screen, not a verdict, and was built to sort stocks rather than to judge a company’s financial reporting.
How does it help in an audit or review?
It gives a structured, repeatable set of comparisons for analytical procedures: for example, a cash flow that has fallen below net income, a rising debt ratio or falling margin are all signals to ask management about. It does not meet the requirements of an analytical procedure on its own, because AU-C 520 expects an expectation, a threshold and investigation of differences, which are the auditor’s to set.
What if a denominator is zero?
The signal is shown as not available and scores no point, so the score can understate strength when data is missing. Check that opening total assets, sales and current liabilities are above zero.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.