Piotroski's 9 Point Security Analysis Model

 

It is an Active Investment Method. Every year new shares are bought and old shares are sold based on the fresh analysis.

The method is  Easy to Understand, Simple to Apply.

 

Dr. Joseph Piotroksi, an accounting professor at Chicago University developed this unique Nine Measure Score Model
The stocks scoring a score of 8 and 9 are the best ‘BUY’ bets

 

Utility of the Method

 

AAII (American Association of Individual Investors)  studies have highlighted the superiority of this method
Highest return among value methods examined by AAII
Over the period    1998 - 2004  - 933.1%
Over the period    1998 - 2003  - 505.8%

 

 

BASIS OF PIOTROSKI MODEL

 

 

Improvement  of Profitability
Improvement  of Leverage
Improvement  of Liquidity
Improvement  of Operational Efficiency Over a period of a year

 

 

Improvement  of the profitability

1.   Positive Net Income
2.   Positive Cash Flow
3.   Cash from Operating Activities exceed the net Income
4.    Return on Assets

 

Improvement of liquidity

5.  Current Ratio

Improvement of leverage

6.  Debt-Asset Ratio

7.  No issue of Equity Capital

 

Improvement of Operational efficiency

8.  Gross Profit Margin

9.  Asset Turnover Ratio

 

 

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Illustration: Maruti Udyog Limited Aprl 2004 to March 2005 Balance Sheet

 

Test	Parameter	March 03-04	March 04-05	Score	Comments
Test 1	Positive Net Income (Fig in Rs. Core)		853.6	1	Positive
Test 2	Positive Cash Flow (Fig in Rs. Crore)		789.2	1	Positive
Test 3	Earnings Quality (Fig in Rs. Crore) CFO>Net Income			0	The cash  flow from operating activity is less
	Cash flow from operating activities		729.4
	Net income		853.6
Test 4	Decreasing Debt (Fig in times) Debt- Total Assets Ratio	0.07	0.06	1	Decreased by 0.01

 

 

 

Test	Parameter	March 03-04	March 04-05	Score	Comments
Test 5	Increase in Working Capital (Current Ratio Fig in times)	2.28	2.67	1	Increased by 0.39
Test 6	Increase in asset Turnover (Fig in times)	1.7	1.8	1	Increased by 0.1
Test 7	Growth in Profitability (Fig in %) Return on Assets	9	13	1	Increased by 4%
Test 8	No Issue of  Stock (Fig in number)	144.5	144.5	1	No issue of stock
Test 9	Competitive position (Fig in %) Gross Profit Margin	11.49	13.06	1	Increased by 1.57
			TOTAL SCORE	8

 

 

 

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