Methodology

The five academically-proven models behind every TickerXray report.

Piotroski F-Score

Joseph Piotroski (2000)

A 9-point scoring system that assesses a company's financial strength across three dimensions: profitability, leverage/liquidity, and operating efficiency. Each criterion is a binary pass/fail test using annual financial data.

Score = Sum of 9 binary tests (0 or 1 each)

Interpretation

7-9: Strong4-6: Moderate0-3: Weak

Components

  • -Profitability: Positive ROA, Positive CFO, Improving ROA, CFO > Net Income
  • -Leverage: Decreasing debt ratio, Improving current ratio, No share dilution
  • -Efficiency: Improving gross margin, Improving asset turnover

Altman Z-Score

Edward Altman (1968)

A formula that predicts the probability of a company going bankrupt within two years. Combines five financial ratios with specific weights to produce a single score.

Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Interpretation

> 2.99: Safe Zone1.81 - 2.99: Grey Zone< 1.81: Distress Zone

Components

  • -A = Working Capital / Total Assets
  • -B = Retained Earnings / Total Assets
  • -C = EBIT / Total Assets
  • -D = Market Cap / Total Liabilities
  • -E = Revenue / Total Assets

Beneish M-Score

Messod Beneish (1999)

A mathematical model that uses 8 financial ratios to detect whether a company has manipulated its earnings. It compares year-over-year changes in key financial metrics to identify anomalies.

M = -4.84 + 0.92(DSRI) + 0.528(GMI) + 0.404(AQI) + 0.892(SGI) + 0.115(DEPI) - 0.172(SGAI) + 4.679(TATA) - 0.327(LVGI)

Interpretation

< -1.78: Unlikely Manipulator> -1.78: Possible Manipulator

Components

  • -DSRI: Days Sales in Receivables Index
  • -GMI: Gross Margin Index
  • -AQI: Asset Quality Index
  • -SGI: Sales Growth Index
  • -DEPI: Depreciation Index
  • -SGAI: SGA Expense Index
  • -TATA: Total Accruals to Total Assets
  • -LVGI: Leverage Index

Sloan Accrual Ratio

Richard Sloan (1996)

Measures the proportion of a company's earnings that come from accruals versus actual cash flows. High accrual ratios suggest earnings may not be sustainable.

Ratio = (NOA_CY - NOA_PY) / Average NOA

Interpretation

|ratio| < 10%: High Quality10% - 25%: Warning> 25%: Danger

Components

  • -NOA = Net Operating Assets = (Total Assets - Cash) - (Total Liabilities - Total Debt)
  • -Lower accruals relative to earnings indicate higher earnings quality
  • -Both Balance Sheet and Cash Flow approaches are computed for comparison

DuPont Analysis

DuPont Corporation (1920s)

Decomposes Return on Equity (ROE) into three components to identify what is driving a company's profitability: profit margins, asset efficiency, or financial leverage.

ROE = Profit Margin x Asset Turnover x Equity Multiplier

Interpretation

High Profit Margin: Strong pricing powerHigh Asset Turnover: Efficient asset useHigh Equity Multiplier: Higher leverage (risk)

Components

  • -Profit Margin = Net Income / Revenue
  • -Asset Turnover = Revenue / Total Assets
  • -Equity Multiplier = Total Assets / Shareholders' Equity
  • -5-year trend analysis reveals structural changes in profitability drivers
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