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We need to talk about Hutchison China Meditech's (LON:HCM) Piotroski F-Score

6th Mar by Jack Brumby

As investors, we want to invest in the best and avoid those heading for trouble, but it's hard to keep tabs on hundreds of companies. That's a lot of noise and we've all got lives to lead. Even though Stockopedia's StockReports provide a wealth of financial data, filtering out the most dangerous stocks can be hard to do and takes time.

But what if you could gauge financial health with a single number?

This is what the Piotroski F-Score sets out to do. Unfortunately, what the F-Score algorithm says for Healthcare operator Hutchison China Meditech (LON:HCM) is not good - especially considering group revenues decreased 19% to $102.2M and net loss totaled $32.7M for the six months ended 30 June 2018.

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Why Hutchison China Meditech (LON:HCM) shareholders need to know the Piotroski F-Score

The Piotroski F-Score is a nine-strong checklist split up into three sections, each looking at a different part of a company's financial situation. Its secret sauce is that, unlike most ratios, the F-Score looks more deeply into the direction in which a company’s financial health is moving. Keeping on top of these trends can help us stay ahead of the game.

When a stock gets beaten down it ends up in the bargain basement of the stock market. From here there are generally three outcomes. The stock either:

  • Stumbles along, zombie-like,
  • Tumbles into administration, or
  • Recovers emphatically

Stanford Finance Professor Joseph Piotroski wanted to sort the wheat from the chaff. After settling on the F-Score, he produced some astonishing results.

Piotroski found that weak stocks with an F-Score of 2 or less are five times more likely to either go bankrupt or delist due to financial problems. Working our way through Piotroski's checklist, we can see that Hutchison China Meditech (LON:HCM) gets a lowly F-Score of 2 out of a possible 9.

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