STA  = Scaled Total Accruals = (CA (t) – CL (t) – DEP (t)) / Total Assets (t)

• CA = Change in current assets – change in cash & equivalents
• CL = Change in current liabilities – change in LT debt included in current liabilities – change in income taxes payable
• DEP = depreciation and amortization expense.

SNOA  = (Operating Assets (t) – Operating Liabilities (t)) / Total Assets (t),

Calculate variables:

• DSRI = Days’ Sales in Receivables Index
• GMI = Gross Margin Index
• AQI = Asset Quality Index
• SGI = Sales Growth Index
• DEPI = Depreciation Index
• SGAI = Sales, General and Administrative expenses Index
• LVGI = Leverage Index
• TATA = Total Accruals to Total Assets

Calculate probit probability of manipulation (PROBM) values:

PROBM = -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

• NIMTAAVG = weighted average (quarter’s Net income/MTA)
  • MTA = Market value of total assets = book value of liabilities +market cap.
  • TLMTA = Total liabilities / MTA
  • CASHMTA = cash & equivalents / MTA
  • EXRETAVG = weighted average(log(1+stock’s return)-log(1+S&P 500 TR return)
  • SIGMA = annualized stock’s standard deviation over the previous 3 months (daily)
  • RSIZE = log (stock market cap / S&P 500 TR total market value)
  • MB = MTA / adjusted book value
    • Adjusted book value=book value+.1*(market cap-book value)
    • PRICE = Log (recent stock price), capped at $15, so a stock with a stock price of $20, would be given a value of log(15) instead of log(20).

Calculate logit for the probability of financial distress (LPFD) values:

• LPFD = -20.26*NIMTAAVG + 1.42*TLMTA – 7.13*EXRETAVG + 1.41*SIGMA – .045*RSIZE – 2.13*CASHMTA+.075*MB – .058*PRICE -9.16

Simultaneously conduct the following screens:

• Eliminate all firms in the top 5 percent of the sample based on Accrual Screens.
• Eliminate all firms in the top 5 percent of the sample based on the Manipulation Screen.
• Eliminate all firms in the top 5 percent of the sample based on the Financial Distress Screen.

8yr_ROA = Eight-Year Return on Assets (Geometric Average).

• Return on Assets = Net Income Before Extraordinary Items (t) / Total Assets (t).
• P_8yr_ROA = percentile (8yr ROA) among all stocks in the universe.

8yr_ROC  = Eight-Year Return on Capital (Geometric Average).

• Return on Capital = EBIT (t) / Invested Capital (t)
• P_8yr_ROC = percentile (8yr ROA) among all stocks in the universe.

FCFA = Long Term Free Cash Flow on Assets

• Sum (Eight-year FCF) / Total Assets (t)
• P_CFOA = percentile (FCFA) among all stocks in the universe.

MG = Margin Growth

• Eight-year Gross Margin Growth (geometric average)
• P_MG = percentile (MG) among all stocks in the universe.

MS = Margin Stability

• Eight-year Average Gross Margin % / Eight-year Gross Margin % Standard Deviation
• P_MS = percentile (MS) among all firms in the universe.

MM = Margin Max

• Max (P_MG, P_MS)

Current Profitability

• ROA = Return on Assets
• F_ROA = 1 if ROA > 0, 0 otherwise
• FCFTA = Free Cash Flow (t) / Total Assets (t)
• F_FCFTA = 1 if FCFTA > 0, 0 otherwise
• ACCRUAL = FCFTA – ROA
• F_ACCRUAL = 1 if ACCRUAL > 0, 0 otherwise

Stability

• DEBT = Long Term Debt (t-1) / Total Assets (t-1) – Long Term Debt (t) / Total Assets (t)
• F_DEBT = 1 if DEBT > 0, 0 otherwise
• CR = Current Ratio (t) – Current Ratio (t-1)
• F_CR = 1 if CR > 0, 0 otherwise
• NEQISS = Net Equity Issuance from t-1 to t
• F_NEQISS = 1 if NEQISS > 0, 0 otherwise

Recent Operational Improvements

• ΔROA = Year-over-year change in ROA
• F_ΔROA = 1 if ΔROA > 0, 0 otherwise
• ΔFCFTA= Year-over-year change in FCFTA
• F_ΔFCFTA = 1 if ΔFCFTA > 0, 0 otherwise
• ΔMARGIN = Year-over-year change in gross margin
• F_ΔMARGIN= 1 if ΔMARGIN > 0, 0 otherwise
• ΔTURN = Year-over-year change in asset turnover
• F_ΔTURN = 1 if ΔTURN > 0, 0 otherwise

***Note: This is different than the 9-point Piotroski F-Score.