The Piotroski F-Score calculation for ASX:AXP / AIRXPANDERS, INC. is shown here. In 2000, Joseph Piotroski published a paper titled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers." This paper described a method of using data from a company's financial reports to help predict future performance.

The Piotroski F-Score, as it is known, is a 9-point discrete score, where 9 is the best, that ranks companies based on a number of financial factors. To calculate the score, we compare nine factors from the two most recent annual reports. If the change in the factor is "good", then we add one to the score. If the change in the factor is "not good", then we add zero. The following explanations are quoted from the paper.




Current profitability and cash flow realizations provide information about the firm’s ability to generate funds internally. Given the poor historical earnings performance of many value firms, any firm currently generating positive cash flow or profits is demonstrating a capacity to generate funds through operating activities. Similarly, a positive earnings trend is suggestive of an improvement in the firm’s underlying ability to generate positive future cash flows.

ROA : Net Income before Extraordinary Items, scaled by Total Assets at beginning of year


CFO: Cash Flow from Operations, scaled by Total Assets at beginning of year


ΔROA: Current Year's ROA less Prior Year's ROA. If this negative, ROA (and therefore profitability) has decreased.


ACCRUAL: Current Year's Net Income before Extraordinary Items less Cash Flow from Operations, scaled by Total Assets at beginning of year. In short, one if CFO > ROA. The relationship between earnings and cash flow levels is also considered. Earnings driven by positive accrual adjustments (i.e., profits are greater than cash flow from operations) is a bad signal about future profitability and returns. This relationship may be particularly important among value firms, where the incentive to manage earnings through positive accruals (e.g., to prevent covenant violations) is strong.



Financial Leverage, Liquidity, and Source of Funds

Three of the nine financial signals are designed to measure changes in capital structure and the firm's ability to meet future debt service obligations. Since many value firms are financially constrained, we assume that an increase in leverage, a deterioration of liquidity, or the use of external financing is a bad signal about financial risk.

ΔLEVER: The historical change in the ratio of long-term debt to average total assets. By raising external capital, a financially distressed firm is signaling its inability to generate sufficient internal funds. In addition, an increase in long-term debt is likely to place additional constraints on the firm’s financial flexibility. An increase in financial leverage is a negative.


ΔLIQUID: The historical change in the firm’s current ratio between the current and prior year, where we define the current ratio as the ratio of current assets to current liabilities at fiscal year-end. An improvement in liquidity is a good signal.


EQ_OFFER: One if the firm did not issue common equity in the year, zero otherwise. Similar to an increase in long-term debt, financially distressed firms that raise external capital could be signaling their inability to generate sufficient internal funds to service future obligations. Moreover, the fact that these firms are willing to issue equity when their stock prices are likely to be depressed (i.e., high cost of capital) highlights the poor financial condition facing these firms.


Operating Efficiency

The remaining two signals are designed to measure changes in the efficiency of the firm’s operations. These ratios are important because they reflect two key constructs underlying a decomposition of return on assets.

ΔMARGIN: The firm’s current gross margin ratio (gross margin scaled by total sales) less the prior year’s gross margin ratio. An improvement in margins signifies a potential improvement in factor costs, a reduction in inventory costs, or a rise in the price of the firm’s product.



ΔTURN: The firm’s current year asset turnover ratio (total sales scaled by beginning of the year total assets) less the prior year’s asset turnover ratio. An improvement in asset turnover signifies greater productivity from the asset base. Such an improvement can arise from more efficient operations (fewer assets generating the same levels of sales) or an increase in sales (which could also signify improved market conditions for the firm’s products).


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