However, CenturyLink, Inc. (NYSE:CTL) does not score any points on the next two criteria. CenturyLink, Inc. (NYSE:CTL)’s shares outstanding grew nearly 20% over the year and the company’s gross margin declined from 41% to 33%.
| Metric | Operating income | Operating cash flow | Score |
|---|---|---|---|
| 4.Quality of Earnings | $776M | $6,070M | 1 |
Having said that the company’s operating cash flow exceeds operating income, scoring it a point on the quality of its earnings.
| Metric | Sales Growth | Asset Growth | Score |
|---|---|---|---|
| 9.Asset Turnover | 19.4% | -3.6% | 1 |
Furthermore, sales grew faster than the value of the company’s assets during 2011-2012 allowing the company to easily pass the asset turnover test.
Total Score: 7
Overall, CenturyLink, Inc. (NYSE:CTL) scores 7, two points away from the maximum of 9, indicating that the company is a financially sound value investment.
Rowan Companies PLC (NYSE:RDC)
| Metric | 2011 | 2012 | Score |
|---|---|---|---|
| 1.Net Income | $203M | 1 | |
| 2.Operating Cash Flow | $393M | 1 | |
| 3.Return on Assets | 2% | 3% | 1 |
| 5.Long-term debt Vs. assets | 16% | 25% | 0 |
| 6.Current Ratio | 8.6 | 15 | 1 |
| 7.Shares outstanding | 126M | 124M | 1 |
| 8.Gross Margin | 26% | 28% | 1 |
Rowan Companies PLC (NYSE:RDC) is last in this trio and the company scores well in the first three criteria. That said, the company’s debt has risen year-over-year meaning that it fails criteria number five. However, Rowan Companies PLC (NYSE:RDC)’s current ratio has nearly doubled and the number of shares outstanding has remained constant winning the company another two points. Finally, the company’s gross margin has expanded 2%.
| Metric | Operating income | Operating cash flow | Score |
|---|---|---|---|
| 4.Quality of Earnings | $203M | $393M | 1 |
Rowan Companies PLC (NYSE:RDC)’s operating cash flow is double its net income, earning a point for the quality of its earnings. Meanwhile, sales have grown 48% during the past year, while assets have grown 16%, winning the company another point for asset turnover.
| Metric | Sales Growth | Asset Growth | Score |
|---|---|---|---|
| 9. Asset Turnover | 48% | 16% | 1 |
Total Score: 8
Overall, Rowan Companies PLC (NYSE:RDC) scores 8, one point away from the maximum of 9, indicating that the company is a financially sound value investment.
Conclusion
Overall, value investing can be fraught with risks but using these strict criteria set out by Joseph Piotroski some of the more speculative investments can be ruled out leaving investors with a basket of financially sound companies that could provide some decent returns like those listed above.
The article Piotroski’s Picks originally appeared on Fool.com and is written by Rupert Hargreaves.
Fool contributor Rupert Hargreaves owns shares of Genworth Financial. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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