In every market cycle, a small number of companies quietly strengthen their balance sheets, improve profitability, and reinvest for growth — often before Wall Street takes notice. For disciplined investors, these are the real opportunities: small, financially sound businesses trading at valuations that still leave room for error.
Two of the most reliable tools for finding these companies are the Piotroski F-Score and the Altman Z-Score. When used together, they highlight small-cap stocks that combine financial improvement with balance-sheet safety — the essence of growth with a margin of safety.
Why Small-Cap Growth Stocks Matter
Small-cap stocks — generally companies with market capitalizations below $2 billion — have historically offered higher long-term returns than their large-cap counterparts. The reason lies in the mathematics of growth and the psychology of markets.
Smaller firms can expand earnings much faster than mature companies because they're starting from a lower base. They can double sales by adding one new product line or opening a few new markets. Their management teams tend to be entrepreneurial and agile, responding more quickly to economic or technological shifts. And since many operate in underfollowed or niche industries, their shares often remain mispriced for long stretches, allowing investors to buy growth at value prices.
Academic studies, including those by Eugene Fama and Kenneth French, have consistently found a "small-cap premium" over long time horizons. But that premium isn't free — it comes with volatility. Small-caps are more sensitive to credit cycles, supply shocks, and investor sentiment. That's why blending quantitative measures of quality and solvency — like the F-Score and Z-Score — is so powerful. These tools help investors separate the durable growers from the speculative pretenders.
When investors focus on financially strong small-cap growth companies, the long-term payoff can be extraordinary. Many of the market's legendary winners — from early-stage industrial suppliers to fintech innovators — began as small companies with improving fundamentals and clean balance sheets. Owning a portfolio of those before they are "discovered" is where real wealth is created.
The Piotroski F-Score: History and Purpose
The Piotroski F-Score, created in 2000 by accounting professor Joseph D. Piotroski at the University of Chicago, was designed to separate the strong value stocks from the value traps. His seminal study, published in the Journal of Accounting Research, showed that within the cheapest decile of the market by price-to-book, companies with high F-Scores outperformed low-scoring peers by more than 7.5% per year.
The F-Score is built on nine accounting signals that measure profitability, leverage, liquidity, and operational efficiency. Each positive result earns one point. Firms scoring 7–9 show robust and improving fundamentals; those scoring 0–3 typically face declining performance or distress.
Piotroski's insight was behavioral as much as financial: investors tend to lump all "cheap" stocks together, ignoring those quietly turning around. The F-Score uncovers those hidden recoveries — a hallmark of the small-cap sweet spot.
The Altman Z-Score: The Original Credit Safety Gauge
The Altman Z-Score, introduced by Edward Altman in 1968, is one of the earliest quantitative models of credit risk. Altman analyzed dozens of financial ratios across hundreds of companies and distilled them into a five-variable formula that accurately predicted bankruptcy risk.
Scores above 3.0 signal low risk of financial distress; those below 1.8 warn of trouble ahead. The Z-Score remains widely used today by lenders, credit analysts, and investors as a shorthand measure of balance-sheet safety.
When paired with the F-Score, it creates a complete picture: one measures financial improvement, the other measures financial durability. The result is a disciplined screen that identifies small-cap companies growing from a position of strength rather than speculation.
Fortunately, we have saved you the time and trouble of digging though the financial statements and completing score sheets by hand for these indicators. YO can know run a simple quick screen in Benzinga Pro that gives you a list of small fast-growing companies with fortress financial statements in just seconds.
Three Examples of Growth with a Margin of Safety
Oil-Dri Corporation of America (ODC)
Founded in 1941, Oil-Dri is a family-controlled producer of absorbent clay products used in consumer, industrial, and agricultural applications. Its most recognizable brand, Cat's Pride, remains a household staple. Over decades, Oil-Dri has evolved into a steady, cash-generating business with no net debt, consistent free cash flow, and 21 consecutive years of dividend increases.
The company's F-Score is near the maximum, reflecting strong profitability, positive cash flow, and improving returns on assets. Its Z-Score exceeds 3, confirming financial safety. Despite its conservative nature, ODC trades around tangible book value and roughly 10× forward earnings, providing both income and upside as cash flow compounds.
Rush Street Interactive (RSI)
Rush Street Interactive, headquartered in Chicago, operates the BetRivers and PlaySugarHouse brands in online gaming and sports betting across North America and Latin America. Founded in 2012 and public since 2020, RSI distinguishes itself from its peers through disciplined growth and a strong balance sheet.
While competitors burn cash on customer acquisition, RSI has reduced marketing intensity and turned adjusted EBITDA positive in multiple quarters. Its Piotroski F-Score reflects rising margins, growing cash flow, and reduced leverage, while its Altman Z-Score above 3 underscores liquidity strength and minimal debt. Trading at a small fraction of its 2021 highs, RSI offers exposure to the digital gaming trend — but with fundamentals strong enough to weather market cycles.
ACI Worldwide (ACIW)
ACI Worldwide, founded in 1975 and based in Miami, builds software that enables real-time digital payments and fraud prevention for banks, merchants, and processors worldwide. It's transitioning toward recurring, subscription-based revenue, driving higher margins and cash flow predictability.
With recurring revenue exceeding 80%, solid cash generation, and controlled leverage, ACIW earns a strong F-Score and a Z-Score comfortably above 3. Despite steady revenue growth and a large installed customer base, it trades at a valuation discount to larger fintech peers. For investors seeking growth in global payment infrastructure without overpaying, ACIW fits perfectly within the "growth with safety" framework.
The Takeaway
The Altman Z-Score and Piotroski F-Score are timeless tools that help investors stay focused on fundamentals amid the noise. They are particularly powerful in the small-cap segment, where information is scarce, volatility is high, and the rewards for disciplined analysis are greatest.
ODC, RSI, and ACIW each show the traits we look for — improving profitability, prudent balance-sheet management, and the ability to self-fund growth. For long-term investors, these are not just "cheap" stocks — they are financially improving businesses with sustainable growth engines, capable of compounding value over many years.
In a market that constantly shifts between greed and fear, this combination — small-cap agility, earnings momentum, and balance-sheet strength — remains one of the few strategies that has consistently delivered growth with a margin of safety.
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