Beneish M-score

What is Beneish M-score?

The Beneish M-score is a mathematical model that uses eight ratios, including ratios weighted by ratios, to determine if a company has been manipulating its profit. Beneisch believes that companies tend to manipulate their profits if they have high sales growth, worsening gross margins, higher operating expenses, and increased leverage. They can manipulate profits by speeding up sales recognition, increasing deferral of costs, increasing accruals, and decreasing depreciation.

Beneish M score is calculated by the formula:

Beneish M Score = -4.840 + 0.920 x DSRI + 0.528 x GMI + 0.404 x AQ + 0.892 x SGI + 0.115 x DEPI - 0.172 x SGAI - 0.327 x LVGI + 4.697 x TATA

Definitions:

• DSRI = (Net receivables_t/ Sales_t) / Net receivables_t-1 / Sales_t-1)
• GMI = [(Sales_t-1 - COGS_t-1) / Sales_t-1] / [(Sales_t- COGS_t) / Sales_t]
• AQI = [1 - (Current assets_t+ PP&E_t+ Securities_t) / Total assets_t ] / [1 - ((Current assets_t-1+ PP&E_t-1 + Securities_t-1) / Total assets_t-1)]
• SGI = Sales_t/ Sales_t-1
• DEPI = (Depreciation_t-1/ (PP&E_t-1+ Depreciation_t-1)) / (Depreciation_t/ (PP&E_t+ Depreciation_t))
• SGAI = (SG&A Expense_t/ Sales_t) / (SG&A Expense_t-1/ Sales_t-1)
• LVGI = [(Current liabilities_t+ Total long Term debt_t) / Total assets_t ] / [(Current liabilities_t-1+ Total long term debt_t-1) / Total assets_t-1]
• TATA = (Income from continuing operations_t - Cash flows from operations_t) / Total assets_t

What does Beneish M-score mean?

If the value of the Beneish M-score is greater than -1.78, there is the likelihood that the company is manipulating its profit.