Wednesday, April 18, 2012

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
 
 
______________________________________________________
 
Illustration: Maruti Udyog Limited Aprl 2004 to March 2005 Balance Sheet
 
Test
Parameter
March
03-04
March
04-05
Score
Comments
Test 1
(Fig in Rs. Core)

853.6
1
Positive
Test 2

 

789.2
1
Positive
Test 3
Earnings Quality
(Fig in Rs. Crore)
CFO>Net Income

 

 

0
The cash  flow
from operating
activity is less

 

 

729.4

 

 

 

853.6

 

Test 4
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
1.7
1.8
1
Increased by 0.1
Test 7
Growth in Profitability
9
13
1
Increased by 4%
Test 8
144.5
144.5
1
No issue of stock
Test 9
Gross Profit Margin
11.49
13.06
1
Increased by 1.57

 

 

 

TOTAL
SCORE
8

 

 
 
 
______________________________________________________
 
 
 
 
 
 
 
Original Knol - http://knol.google.com/k/narayana-rao/piotroski-s-9-point-security-analysis/2utb2lsm2k7a/ 2288

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