Why Eagers Automotive (ASX:APE) passes these financial checks

One of the biggest challenges faced by stock market investors is evaluating the financial health trends of the stocks they own... and the stocks they might be interested in owning. This is even more pressing when there's so much economic uncertainty around.

Good quality stocks that can weather harsh conditions are naturally in demand. But telling which ones are more likely to flourish than fail can be hard to do. 

What’s needed is a helping hand in finding stocks in the strongest financial shape across the market. And that’s where something called the Piotroski F-Score comes in. 

So, what is the F-Score checklist and how does Eagers Automotive rate against it?

In search of quality

The F-Score was introduced to the world in 2000 by an accounting professor at Stanford University called Joseph Piotroski.

Its expertise lies in the analysis of 9 important financial measures that are useful in detecting firms with an improving health trend. The higher the score out of 9, the better.

Importantly, the F-Score works by looking back over a company’s previous financial statements to find the most important signs of strength or weakness. 

Piotroski used the F-Score to find cheaply-priced value stocks that were recovering. But his quality checklist was quickly embraced by analysts and fund managers as a go-to test of any company’s quality.

The nine checks focus on three key areas of financial analysis:

Profitability - the F-Score looks at operating profits, cash flow and earnings quality to see if the business can sustain itself and even pay dividends. 

Capital structure - these checks look for any red flags over the health of the balance sheet, including debt and share issuance.

Operating efficiency - the F-Score looks for positive trends in gross margins and asset turnover.

So how does Eagers Automotive perform against the F-Score?

Currently, Eagers Automotive has a Piotroski F-Score of 9 - signalling that it's towards the top of the range of this quality-focused accounting checklist.

Check the health of any stock

Overall, Piotroski’s F-Score is a useful checklist for investors looking for an instant assessment of a company’s financial health trend. High F-Scores may point to firms that are strong, stable and profitable, with the potential to deliver predictable returns. 

This assessment of fundamental health won’t always provide protection from trouble, but for those looking for a way of assessing the trends in a company’s financial track record, the F-Score could be a helpful place to start.

What does this mean for potential investors?

Eagers Automotive has an F-Score that suggests it could be a promising investment candidate worthy of further research - but it's only a first step. Higher F-Score stocks can still have weaknesses and may trade at premium prices compared to other stocks. We've identified some areas of concern with Eagers Automotive that you can find out about here.