Beneish M Score

The Beneish M score was created by Professor Messod Beneish to detect earnings manipulation.

It is an extremely useful quality check when screening for attractive stock investments.

Beneish M Score Breakdown

How to Detect Earnings Manipuation

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BENEISH M SCORE FORMULA

DSRI = Days Sales in Receivables Index

Measured as the ratio of days' sales in receivables in year t to year t-1. A large increase in DSR could be indicative of revenue inflation.

GMI = Gross Margin Index

Measured as the ratio of gross margin in year t-1 to gross margin in year t. Gross margin has deteriorated when this index is above 1. A firm with poorer prospects is more likely to manipulate earnings.

AQI = Asset Quality Index

Asset quality is measured as the ratio of non-current assets other than plant, property and equipment to total assets. AQI is the ratio of asset quality in year t to year t-1.

SGI = Sales Growth Index

Ratio of sales in year t to sales in year t-1. Sales growth is not itself a measure of manipulation. However, growth companies are likely to find themselves under pressure to manipulate in order to keep up appearances.

DEPI = Depreciation Index

Measured as the ratio of the rate of depreciation in year t-1 to the corresponding rate in year t. A DEPI greater than 1 indicates that assets are being depreciated at a slower rate. This suggests that the firm might be revising useful asset life assumptions upwards, or adopting a new method that is income friendly.

SGAI = Sales, General and Administrative expenses Index

The ratio of SGA expenses in year t relative to year t -1.

LVGI = Leverage Index

The ratio of total debt to total assets in year t relative to yeat t-1. An LVGI >1 indicates an increase in leverage.

TATA – Total Accruals to Total Assets

Total accruals calculated as the change in working capital accounts other than cash less depreciation."

Beneish M Score Formula (Original 8 Variables)

The eight variables are then weighted together according to the following:

M = -4.84 + 0.92*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI + 0.115*DEPI – 0.172*SGAI + 4.679*TATA – 0.327*LVGI

A score greater than -1.78 indicates a strong likelihood of a firm being a manipulator. In his out of sample tests, Beneish found that he could correctly identify 76% of manipulators, whilst only incorrectly identifying 17.5% of non-manipulators.

Beneish M Score Formula (Revised 5 Variables)

The five variable version excludes SGAI, DEPI and LEVI which were not significant in the original Beneish model.

M = -6.065 + 0.823*DSRI + 0.906*GMI + 0.593*AQI + 0.717*SGI + 0.107*DEPI

A score greater than -1.78 indicates a strong likelihood of a firm being a manipulator.

Beneish M Scores for All U.S. Stocks