Can F-scores uncover stock market winners?

By: Tim Bennett
Fans of “F-scores” claim they can reveal future stock market winners. Tim Bennett takes a look in his latest video.

Can F-scores uncover stock market winners?

Value investors are often on the look-out for stocks that are under-rated by the wider market. Enter the F-score. Fans claim it can separate good value stocks from bad using a simple scoring system. Are they right?

Who came up with F-scores?

The Piotroski F-score was devised by Stanford Accounting Professor, Joseph Piotroski. He claimed that by using F-scores and the appropriate investing strategy, an equity investor could outperform the wider market on a consistent basis.

What are F-scores?

Piotroski suggested starting with low price-book stocks (a topic I cover elsewhere) and then screening them for high F-scores, based on nine criteria. These can be grouped into three categories covering profitability, leverage and efficiency.
The strategy that will subsequently produce the best results buys strong F-score stocks and shorts (or avoids) weak ones.

The nine key tests

To work out an F-score, an investor needs to hunt down nine separate ratios and then score each one on a 1 or 0 basis, depending on whether a stock passes, or fails, the test.


There are four key tests under this heading. The idea is that a company that passes them all would be scored a maximum of 4 points. A firm that fails all four, on the other hand, would get zero. These tests are all built around a firm’s ability to generate profit, cash flow and overall returns.


The next three tests look at a firm’s ability to pay debts as they fall due – in other words, its short-term financial strength.

Operational efficiency

The last two tests deal with a firm’s ability to generate a decent margin on its sales and to turn assets into sales. The maximum score is 2 and the minimum 0.
Having done all nine tests, an investor simply adds up the scores to get a total. The higher the better, with a score of 8 or 9 suggesting strength under the F-score system. According to Piotroski, this system worked well during the period 1976-1999 so the key question is: does it work now?

Recent evidence

Naturally, opinion is divided. Some critics argue that the F-score was well suited to its time but is now too well known to add real value. However, some big recent studies disagree, such as this one from Turtle and Wang between 1973 and 2014.
So, why would high F-score stocks produce better subsequent returns than low F-score stocks, especially amongst smaller caps? The authors point to several factors, including the information asymmetry around smaller stocks in particular, plus the tendency for institutional investors to go for liquid stocks (which creates a “liquidity premium”).


It is always dangerous to rely on one stock-picking metric alone. However, F-scores do still have a place in the investor’s toolbox. Used correctly, they are a useful way to screen value stocks via some key questions about a firm’s financial strength.