hey guys welcome to another episode with me shashank gurudpa and in today's episode i'm going to talk about a very unique score known as the petrovsky score now when we do stock selection right we become very subjective and intuitive to our stock selection when it comes to investing now to remove this confusion of how to do a stock investment the petrovsky score is a very good tool now today, i am going to cover everything about the petrovsky score that an investor needs to know now you might have heard about this but we will talk in detail about what this score is.
now i'm going to cover who invented this petrovsky score. what is the petrovsky score how to calculate this petrovsky score how to interpret this in petroski score so that you can use it for your stock selection and i'm also going to show you top 5 indian stocks based on this score okay so let's begin.
Piotroski score Explained
now the first thing to understand here is who invented the petrovsky score so this was invented by an american professor known as joseph petrovsky he was an american professor of accounting at stanford university basically released a paper in the year 2000 titled value investing.
the use of historical financial statements information to separate winners from losers now basically what he did he did a study and he noticed a very weird pattern in the study right so he did a back testing back testing is basically taking data from so many years in the past and testing it for some theory.
now petrovsky basically found that buying the top stocks in the market according to his petrovsky score and shorting the worst stocks in the market market according to his petrovsky score gave him a 23 annualized gains from 1976 to 1996 that's 23 percent kg more than double of the s p 500 broad market index.
now the petrovsky score or the petrovsky f score is basically a nine point valuation metric and is derived from his research now this became very popular in the investing community and he became very popular as well.
now don't worry i'm going to tell you what this petrovsky score is and how you can analyze stocks with the petrovsky score now the petrovsky score is very simple it is a discrete score between zero and nine and that reflects the nine criteria that are there which is basically to determine the strength of the financial position of a company.
now it is used to determine the best value stocks so nine will be the best stock and zero will be the worst stock now how to calculate the pitersky score now pay very close attention to this the score is calculated based on nine criteria and they're divided into three groups okay so the first group is called profitability group.
so pay attention the first criteria is basically return on assets now return on assets one point if it is positive in the current year or a zero if it is not positive in the current year.
so basically they want a company that is positive return on assets it's giving right second score is operating cash flow again one point if it's positive in the current year and zero if it's negative.
third point is change in return of assets or roa change in roa now if the you'll get one point if the roa is current your iron is higher than the previous year or zero if it is going downwards.
we don't like it it has to go upward it has to be more then you get one more point so totally three points now the fourth point is called accuracy now accurate is basically operating cash flow divided by total assets so one point if operating cash flow divided by total assets is higher than the return on assets in the current year.
again zero if it is not so four points are done here and this was with respect to profitability ratios on on the entire financial statements next category i told you.
it's divided into three categories the next category is called leverage liquidity and source of funds now change in leverage change in leverage basically long-term ratio now one point of the ratio is lower this year compared to the previous one.
leverage ratio is what basically i don't have if i'm taking too much loan from the market it is considered bad so my leverage goes down right so one point if it's low.
so we want it to be lower right not more next we have something known as change in current ratio now one point if it's higher than the previous year again we get one point or else zero so we only want growth okay so change in current ratio should be higher than its previous ratio.
we'll get one point over there then we have change in the number of shares now if one point if no new shares are issued during this year okay if no new shares are issued during this year it is considered a plus point why because if new shares are coming in the market will start getting diluted and the market cap will slowly go down.
your price will get adjusted that will also go down it will become a bad thing for you now the third category okay the last two points your third category is called operating efficiency now they check petrovsky basically checks change in gross margin one point if it is higher in the current year compared to the previous year so i want my margins to be higher if margins are higher obviously your profits will be higher and the second one is change in asset turnover ratio now one point if it is higher in the current year compared to the previous year now wait these were the nine points now you will be thinking shashank these nine points that you have mentioned if you have to calculate the petrovsky score by myself it'd be very time consuming and it's too tough and i can't understand how to do this i have to put all of this is very confusing tell me a simple and fast method so i'm just going to tell you a simple and fast method that you don't have to do all the calculations by yourself you can actually take help of free screeners available on the internet so you can just go to the internet and find petroski score screeners and that will help you do your analysis okay now how to interpret this petrovsky score or how to understand what is good what is bad it is very simple right it's a straightforward interpretation if the stock has a score of eight or nine it is considered thumbs up good score right because you see all of it is positive but if the stock is considered bad it has zero to two points and it's considered a weak stock it might go down so good stock is a value stock weak stock is a shorting stock that is what basically it says not only that i'm also going to tell you five stocks in the indian base with the with respect to petrovsky score that look very attractive so instead of just under understanding this theory i'm going to show you practical also i'm going to show you what it is now what i have done is we have chosen basically stocks with respect to petrovsky score that have a petrovsky score of nine like which is the highest value stock apart from that i've put a few screeners as well the few screeners are i have put market cap should be greater than 5000 crores return on equity should be greater than 20 net profit margin should be greater than 15 percent debt to equity ratio should be low at 0.5 and the final thing is last five years compounded annual sales growth should be greater than 10 and after doing all this we have taken the top five companies based on the filters that have come with respect to market capitalization and i'm going to show it to you on your screen now now the first company here is tanla platforms okay thunder platform is trading at a 16 000 market cap 16 000 crore market cap with a p e of 37.26 debt to equity ratio nothing badly anything 0.04 price to book 15.61 return on equity look at this in percentage terms is 44.65 and has a petrovsky score of nine that means financially it is beautiful next we have iex also known as indian energy exchange which we've been trending right now 23 000 crores 88 p slightly on the higher side 0.02 degree ratio price to book 37.23 again return on equity is 46.2 and petrovsky score of nine third we have another fundamentally strong stock called dr lal path labs again 30 000 crore market cap here 75 price to earnings ratio again barely any debt to equity ratio 0.03 price to book is 22.15 and return on equity is 25.13 again petroski score is nine all of them are nine then we have another strong company called supreme industries okay 31 000 crore market cap 26.82 uh price to earnings ratio negligible debt to equity at 0.01 price to book is 9.29 and return on equity is 35.91 so this is again great and finally we have a mega stock okay a very very very large cap stock called nestle india 1 lakh 82 000 crore market cap 81 price to earnings ratio very high 0.07 debt to equity ratio uh and price to book is 81.62 and return on equity is 105 which is insane again it has a petrovsky score of nine so this is basically how you understand petrovsky score and i hope you got a good idea of understanding what petrovsky score is finally we come to the end of the video now i hope it was easy to understand what petrovsky score is we might have seen it in different websites but we didn't know what petrovsky score was but now you know that it's basically nine different criterias with respect to the financial statements and if it is positive which is close to nine that means the stock is a value stock and if you look at the examples we gave all of them were strong fundamental stocks right and all of them are like for a long term perspective nestle india has been giving consistent returns for a very long period of time and petrovsky score basically determines this so i hope you know you could understand more from this video and i hope you liked it now also one very important announcement grow has basically started their own telegram channel okay and this telegram channel is awesome uh you can get latest updates news about personal finance news about the stock market and much more and you also get a lot of result updates so basically if you join this telegram channel you'll be up to date with all the results right i'm on that telegram channel and i'm constantly getting up-to-date results about the market and what's happening in the market any news comes on the grow telegram channel so if you want to be a part of it it's completely easy it's completely free the link is in the description click on it and join the telegram channel so this is me shashank udupa signing off and i hope you guys like this video if you did like it please click on the like button click on the subscribe option and i will see you guys soon any stocks that are mentioned in this video are not a buy or sell recommendation this is only for educational purposes so please do not consider anything as an investment advice investment in securities market are subject to market risks 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