Summary

The G-Score is a fundamental analysis screen which ranks highly valued stocks – or "low book to market" stocks – according to 8 growth criteria. Just as  the Piotroski F-Score aims to separating winners amongst the value universe (the "dusty gems"), the G-Score seeks to separate out the winning growth/glamour stocks from the "fallen stars".  

Background

Partha Mohanram is Associate Professor of Finance at Columbia University. His 2004 paper extends the analysis done by Piotroski whose F-Score applies fundamental analysis to filter value – or “low book to market” value stocks into winners and losers. Mohanram’s G-Score is an 8 factor model which focuses instead on the other end of  spectrum of Book/Market ratios, namely growth – or “low book to market” – stocks, using three types of signals:

  • Signals based on Earnings and Cash Flow Profitability (criteria 1, 3 & 3 below) – This is because firms that are currently profitable are seen as likely to be fundamentally strong and maintain their fundamental strength in the future.
  • Signals Related to Na? ?ve Extrapolation     (4, 5) – Researchers have shown that the stock market tends to naively extrapolate current fundamentals for highly valued stocks – stability of earnings may ascertain whether this extrapolation is justified and help distinguish between firms with solid prospects and firms that are overvalued because of hype or glamour.
  • Signals Related to Accounting Conservatism (6,7, 8) - The final three growth signals looks for long-term actions (R&D, capital expenditures and advertising) which firms take that may depress current earnings and book values, but may boost future growth. 

Definition / Calculation of the G-Score

Companies which ranks in the bottom 20% of book to market ratios are then scored 1 or 0 according to the following growth criteria. The total score for a company in a given year therefore ranges from 0 to 8.

  1. Score 1 if Return on Assets is above average for the industry
  2. Score 1 if Cash Flow Return on Assets is above average for the industry – this is added as earnings may be less meaningful than cash flows for early stage firms, many of which are growth firms
  3. Score 1 if cash flow from operations exceeds net income. Research has shown the importance of accruals by demonstrating that firms with a greater accrual component in their earnings generally underperform in the future, potentially because of the lower…

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