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Does It Work: Piotroski's F Score in Indian Equity Market in 2021 ?

In 2000, a young Joseph D. Piotroski at the University of Chicago Graduate School of Business published a paper titled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers”. The paper attracted a lot of attention in the financial world as it claimed that investors can potentially make handsome returns with companies having a high book to market ratio.


Piotroski had identified 9 distinct elements for his analysis to identify financially strong and distressed firms in the market. Companies with strong financial fundamentals would get a score of around 4-5 and companies with weak financial fundamentals would have a low F score.He considered the following financial points:

  1. Return on assets (ROA)

  2. Cash flow from operations

  3. Change in ROA

  4. Change in Accruals

  5. Change in leverage

  6. Change in liquidity

  7. Change in equity

  8. Change in margin

  9. Change in asset turnover


How to use the variables to generate F score for a company
How to use the variables to generate F score for a company

Formula to calculate F score
Formula to calculate F score


Now since we have a decent understanding of F-score, lets see how it performs in Indian equity market.


I came across a research paper which attempted to do the same and this blog is a simpler explanation of the same. The research paper aimed to see if F Score when applied to high book to market firms can essentially move the current and future stock performance in favor of the investor or not.


The study concluded that an F score when used for companies having a high book to market value and a high F score can shift the distribution of the returns in the Indian equity market. The researchers found the impact of the F score on the future stock valuation to be statistically significant with 5% level of significance. Also, there exists a positive relationship between a high F score and future stock performance with 10% statistical significance.


This could be due to the fact the companies with high book to market value are considered fundamentally cheap or underrated and thus investing in them could bring more returns to the investors as they hold a strong potential to go big in the future.


However, one should also pay attention to the fact that just using an F score for making his investment might not give him a true picture of the stocks. It could be the company having a high book to market value may not be ill priced and thus investing in them may not bring the expected returns.

Another reason for not to completely rely on the F score is that it focuses on the current performance of the company and thus the impact of the F score may be skewed.


Also, it will too quick to jump to a conclusion since a lot of studies have not been done in the Indian market to gauge the impact of F score in the equity market.


So does F score work in the Indian equity market. Well, I leave that up to you to explore.





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