Weyco Group Inc scores a 6 on Piotroski's method

Piotroski chose nine fundamental signals to measure three areas of the firm's financial condition: profitability, financial leverage/liquidity, and operating efficiency. In this article I will show how this method works out for Weyco Group Inc, a dividend champion which paid dividends for over 30 years. This stock came up in one of my screeners and I was curious to see how the fundamentals look.

1. Return on Assets

Net income before extraordinary items, one point awarded if positive, zero otherwise. If the firm's ROA is positive, the indicator variable is equal to one, zero otherwise.

Table 1	2012	2011	2010
Net Income	$18,96	$15,25	$13,67	million
Total Assets	$285,32	$273,51	$223,44	million
Return on Assets	6,6%	5,6%	6,1%	%

Result: 1 point

2. Operating cash flow

It's important a company has positive cash flow! Positive operating cash flow in the current year gives 1 point.

Table 2	2012	2011	2010
Operating cash flow	$17,99	$17,14	$0,11	million

Result: 1 point

3. Higher return on assets

Higher return on assets in the current period compared to the ROA in the previous year gives 1 point. From the table at section 1, return on assets is 6.6% in 2012, compared tot 5.6% in 2011.

Result: 1 point

4. Cash flow from operations are greater than ROA 

This is used because in 1996, Sloan showed that earnings driven by positive accrual adjustments (i.e., profits are greater than cash flow from operations) is a bad signal about future profitability and returns.

Table 4	2012	2011	2010
Net income less extraordinary items	$18,96	$15,25	$13,67	million
Operating cash flow	$17,99	$17,14	$0,11	million

Result: 0 points

5. Lower ratio of long term debt
Piotroski gives one point to this variable if the company's leverage ratio fell relative to the previous year, and zero if it rose.

Table 5	2012	2011	2010
Total Assets	$285,32	$273,51	$223,44	million
Long-term debt	$-	$-	$-	million
Ratio	0%	0%	0%	%

WEYS carries no long-term debt, but does have short-term debt (to be clear).

Result: 1 point (even though technically, the ratio did not improve...)

6. Higher current ratio
This variable measures the historical change in the firm's current ratio between the current and prior year. Improvement in liquidity adds one point to the score, because it is a good sign of the company's ability to service current debt obligations, zero points if the current ratio decreased.

Table 6	2012	2011	2010
Current Assets	$146,44	$128,23	$111,49	million
Current Liabilities	$70,02	$64,90	$27,71	million
Current Ratio	209%	198%	402%	%

Result: 1 point

7. Outstanding shares
Companies that raise external capital could be signaling their inability to generate sufficient internal funds to service future obligations. This indicator variable will equal one if the company did not issue common equity the previous year, zero if it did.

Table 7	2012	2011	2010
Outstanding shares	10,83	10,92	11,36	million

Result: 1 point

8. Higher gross margin

The firm's current gross margin ratio is calculated as follows: (revenue - cost of goods sold) / revenue. An improvement in margins signifies a potential improvement in factor costs, a reduction of inventory costs, or a rise in the price of the firm's product.

Table 8	2012	2011	2010
Revenue	$293,47	$271,10	$229,23	million
Cost of goods sold	$178,58	$164,38	$138,93	million
Gross margin	39,1%	39,4%	39,4%	%

Result: 0 points (although the difference is quite small!)

9. Higher asset turnover ratio

The firm's current year asset turnover ratio (sales/beginning of the year assets) less the prior year's asset turnover ratio. An improvement in asset turnover signifies greater productivity from the asset base. This can come from more efficient operations (fewer assets generate the same amount of sales) or an increase in sales, which could also signify improved market conditions for the company's products.

Table 9	2012	2011	2010
Sales / revenue	$293,47	$271,10	$229,23	million
Beginning of the year's assets	$273,52	$223,44	$207,14	million
Asset Turnover ratio	107,3%	121,3%	110,7%	%

Result: 0 points

Summary
Weyco Group Inc scores 6 points on Piotroski's method to evaluate shares. While this is a nice performance, there probably are stocks out there with better scores. So for now, I'll keep Weyco on my watchlist to see if they improve their operating efficiency this year.

Profitability	Points
1. Return on Assets	1
2. Operating cash flow	1
3. Higher return on assets	1
4. Cash flow from operations are greater than ROA	0
Leverage, Liquidity and Source of Funds	Points
5. Lower ratio of long term debt	1
6. Higher current ratio	1
7. Outstanding shares	1
Operating Efficiency	Points
8. Higher gross margin	0
9. Higher asset turnover ratio	0
Total score	6 points

Do you use Piotroski's method to evaluate shares? Let me know!

PM: I've corrected table 9 because I used the wrong values for revenue.