How to Spot Financially Strong Companies

How to Spot Financially Strong Companies
4:57
Published on: Dec 3, 2024 8:00:00 AM

At EasyEquities, we’re passionate about sharing insights that empower our community to understand the fundamentals of financial health. One metric that stands out for evaluating a company’s financial position is the Piotroski F-Score. This score is a simple yet powerful way to gauge a company’s financial strength based on publicly available data.

Here, we’ll break down the F-Score, explain how it works, and explore why it’s a fascinating lens through which to view financial data.


What is the Piotroski F-Score?
The Piotroski F-Score is a scoring system that rates companies on a scale from 0 to 9. A higher score reflects stronger financial fundamentals, while a lower score may indicate potential challenges. The F-Score is derived from nine financial metrics grouped into three categories: Profitability, Leverage/Liquidity, and Operational Efficiency.

Breaking Down the F-Score
1. Profitability Metrics

  • Net Income (NI > 0):
    A company that reports a positive net income demonstrates its ability to generate profit.

  • Return on Assets (ROA > 0):
    This metric highlights how efficiently a company uses its assets to generate earnings.

    • Formula: 

  • Operating Cash Flow (OCF > 0):
    A positive cash flow from operations suggests the company’s ability to sustain its activities without relying on external financing.

  • Quality of Earnings (OCF > NI):
    This ensures that the reported earnings are supported by cash flow, rather than accounting adjustments.
2. Leverage, Liquidity, and Source of Fund

  • Change in Leverage ():
    A decrease in long-term debt indicates improved financial stability.

  • Change in Current Ratio ():

    • Formula: 
    • A rising current ratio reflects better liquidity and a stronger position to cover short-term obligations.

  • No New Shares Issued:
    This signals that the company is financing its growth through internal resources, not by diluting existing shareholders.

3. Operational Efficiency Metrics
  • Improved Gross Margin ():
    A higher gross margin shows the company is effectively managing costs relative to its revenue.

  • Improved Asset Turnover ():

    • Formula: 
    • This reflects efficient use of assets to generate sales.
Financially Strong Companies in EasyEquities
After applying the F-Score to companies in our international wallet offerings as of November 15th, we found several that scored a perfect 9. These companies exhibit robust financial health across all nine metrics:
  • Halliburton Co
  • Qualcomm Inc
  • Rockwell Automation Inc
  • Salesforce.Com Inc
  • Broadcom Inc
  • PointsBet Holdings Ltd
  • Kinross Gold Corp
  • Baidu Inc - Spon Adr
  • AT&T Inc
  • Synopsys Inc
  • WW Grainger Inc
Why This Matters

The Piotroski F-Score offers a unique perspective on financial data, helping to highlight companies with strong fundamentals. Understanding how these metrics interrelate can provide a clearer picture of a company’s overall health and operational strength.

We hope this deep dive into the F-Score helps you better understand what makes a company financially strong. Let us know if you’d like to see more insights like these!

 
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Honourable mention, 2nd runners up. Companies with an F-score of 8
  • Caxton CTP Publishers and Printers Limited
  • Rex Trueform Group Limited
  • Clicks Group Limited
  • Sappi Limited
  • Super Group Limited
  • Textainer Group Holdings Limited
  • Texton Property Fund Limited
  • Analog Devices Inc
  • Adobe Systems Inc
  • Wix.com Ltd Equity
  • Alibaba Group Holding Ltd
  • Westinghouse Air Brake Technologies Corp
  • Micron Technology Inc
  • MercadoLibre Inc
  • Schlumberger Ltd
  • Coca-Cola Co/The
  • Otis Worldwide Corporation
  • Mondelez International Inc-A
  • IDEXX Laboratories Inc
  • Electronic Arts Inc
  • Yum Brands
  • Wal-Mart Stores Inc
  • CME Group
  • Nvidia Corp
  • Procter & Gamble Co/The
  • Caterpillar Inc
  • Colgate-Palmolive Co
  • Kellanova
  • Simon Property Group Inc
  • Paypal Holdings Inc
  • Wynn Resorts Ltd
  • Verisk Analytics Inc
  • Kraft Heinz Co/The
  • Ferrari NV
  • Netflix Inc
  • SBA Communications Corp
  • Paychex Inc
  • Ross Stores Inc
  • Trip.com Group Limited
  • Fastenal Co
  • Starbucks Corp
  • Cintas Corp
  • Amazon.Com Inc
  • New Hope Corporation Ltd
  • Resmed Inc Cdi 10:1 Foreign Exempt NYSE
  • NEXTDC Limited
  • News Corp Class B Voting Common Stock-Cdi
  • Mcmillan Shakespeare
  • Barrick Gold Corporation
  • CVR Energy Inc
  • Pegasystems Inc.
  • AerCap Holdings NV
  • Hewlett Packard Enterprise Co
  • iQIYI Inc
  • AAON Inc
  • Hutchison China MediTech Ltd
  • Molson Coors Beverage Co
  • Zoetis Inc
  • Novo Nordisk A/S
  • Catapult Group International Ltd
  • Blue Star Helium Ltd
  • StoneCo Ltd
  • Zimmer Biomet Holdings Inc
  • Next PLC
  • Rentokil Initial PLC
  • AppLovin Corp
  • Sherwin-Williams Co/The
  • Crocs Inc
  • SAP SE
  • Haleon plc
  • Marsh & McLennan Cos Inc
  • CZR Resources Ltd
  • Mineral Commodities Ltd
  • Interactive Brokers Group Inc
  • BWX Technologies Inc
  • Stelar Metals Ltd
  • Vertiv Holding Co.
  • MSCI Inc
  • Fair Isaac Corp


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Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an external contributor as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.

 

Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an employee of EasyEquities an authorised FSP (FSP no 22588) as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.

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