Tag: financeterms

What is Piotroski Score?

The Piotroski Score is a discrete score between zero and nine 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.

It was named after Chicago Accounting Professor Joseph Piotroski, who devised the scale, according to specific aspects of company financial statements. Aspects are focused on the company’s accounting results in recent time periods (years). For every criterion met (noted below), one point is awarded; otherwise, no points are awarded. The points are then added up to determine the best value stocks.

The Piotroski Score is broken down into the following categories:

  1. Profitability
  2. Leverage, liquidity, and source of funds
  3. Operating efficiency

1- Profitability criteria include:

  • Positive net income (1 point)
  • Positive return on assets in the current year (1 point)
  • Positive operating cash flow in the current year (1 point)
  • Cash flow from operations being greater than net Income (quality of earnings) (1 point)

2- Leverage, liquidity, and source of funds criteria include:

  • Lower ratio of long term debt in the current period, compared to the previous year (decreased leverage) (1 point)
  • Higher current ratio this year compared to the previous year (more liquidity) (1 point)
  • No new shares were issued in the last year (lack of dilution) (1 point).

3- Operating efficiency criteria include:

  • A higher gross margin compared to the previous year (1 point)
  • A higher asset turnover ratio compared to the previous year (1 point)

If a company has a score of 8 or 9, it is considered a good value. If the score adds up to between 0-2 points, the stock is considered weak.

What Are Distressed Securities?

Distressed securities are financial instruments issued by a company that is near to—or currently going through—bankruptcy. Distressed securities can include common and preferred shares, bank debt, trade claims, and corporate bonds. Even a particular security can be considered distressed if it fails to maintain agreement. Because of the company’s inability to meet its financial obligation their financial instruments suffer a reduction in value, although due to this they can offer a high risk investors a potential for high returns. These high risk investors are sometimes called as ‘hawks’

Example– Securities are labeled as distressed when the company issuing them is unable to meet many of its financial obligations. In most cases, these securities carry a “CCC” or below credit rating from debt-rating agencies. Distressed securities can be contrasted with junk bonds, which traditionally have a credit rating of BBB or lower.