Beneish M-Score Definition
Beneish M score is the mathematical model which was created by Professor Messod Beneish and it is used for the purpose of finding out that whether the company has done any sort of manipulation with its earning with the help of the different financial ratios and the eight mentioned different variables.
The eight variables required for calculating the M-Score are calculated using the data from the income statement, balance sheet and cash flows of the company and then M-Score is calculated to know the degree of manipulation in earnings by the company.
- If Beneish M-score is less than the -2.22 then it suggests that the company under consideration is not a manipulator
- If Beneish M-score is more than the -2.22 then it provides the signal that the company can be the manipulator
Components of Beneish M-Score
The Beneish M score is calculated on the basis of the combination of eight different types of indices which are as follows:
#1. Days’ Sales in Receivables Index (DSRI)
It is the ratio of days sales in receivables in a year with respect to the previous year. The large increase in the value of DSR is an indicator of revenue inflation.
#2. Gross Margin Index (GMI)
It is the ratio of gross margin of a year with respect to the previous year.
#3. Asset Quality Index (AQI)
It is the ratio of non-current assets (other than the plant, property and the equipment) to total assets of a year versus the prior year.
#4. Sales Growth Index (SGI)
It is the ratio of sales of a year with respect to the previous year.
#5. Depreciation Index (DEPI)
It is the ratio of the rate of depreciation of a year with respect to the previous year.
#6. Sales, General, and Administrative expenses Index (SGAI)
It is the ratio of SG&A expenses of a year with respect to the previous year.
#7. Leverage Index (LVGI)
It is the ratio of total debt to total assets of a year with respect to the previous year.
#8. Total Accruals to Total Assets (TATA)
It is calculated as the change in the accounts of working capital other than the cashless depreciation
Beneish M Score Formula
Eight different types of indices are weighted together as per the following formula to derive at the M-score:
Calculation of Beneish M-Score (with Examples)
The following are the different Beneish ratios. Calculate the M-score.
- DSRI : 0.814
- GMI : 1.556
- AQI : 0.608
- SGI : 0.755
- DEPI : 0.801
- SGAI : 1.110
- LVGI : 0.878
- TATA : 0.044
Calculation of M-Score
M-score= -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
M-score= -4.84 + 0.749 + 0.822 + 0.246 + 0.673 + 0.092 – 0.191 + 0.206 – 0.287
In this case, since the M-score is -2.53, which is more than -2.22 t is probable that the company is a manipulator and thus analysts should be cautious about the same.
Advantages of the Beneish M-Score
- It is helpful in knowing that up-to what extent the management of the company are manipulating its earnings as it calculates the degree of manipulation in earnings by the company
- It helps the analysts in detecting the financial accounting frauds in the company.