# Beneish M Score

The Beneish M Score helps to uncover companies who are likely to be manipulating their reported earnings. Companies with a higher score are more likely to be manipulators. This is a probabilistic model, so it will not detect manipulators with 100% accuracy.

The best cut-off point depends on the costs mistakenly classifying in one of two ways:

1) Classifying firm that is manipulating earnings as a non-manipulator (Type I error), and

2) Classifying a firm as a manipulator when it actually was not manipulating (Type II Error).

Here are optimal cut-offs according to Beneish, presented as the score followed by the cost of Type I error relative to cost of Type II error):

M Score HTML Table:

Score | Relative Error Costs(Type I:Type II) |
---|---|

M Score > -1.49 | (10:1) |

M Score > -1.78 | (20:1) |

M Score > -1.89 | (40+:1) |

Beneish excluded financial institutions from his sample when calculating the M-Score, so extreme care should be taken when looking at M-Scores of financial firms - their business models are different from the manufacturing and other service firms that Beneish used in his study.

If you want more details, here is the original Beneish M Score Paper, or you can learn about our calculation by clicking "Learn More" below.

Based on an eight factor model that gives a score.**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**

Where:**Days Receivable Index (DSRI) is:**

DSRI = (Net Receivables_{t} / Sales_{t}) / Net Receivables_{t-1} / Sales_{t-1})**Gross Margin Index (GMI) is:**

GMI = [(Sales_{t-1} - COGS_{t-1}) / Sales_{t-1}] / [(Sales_{t} - COGS_{t}) / Sales_{t}] **Asset Quality Index (AQI) is:**

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})]

NOTE: Securities is approximated by total long term investments, and is an adjustment described in Whalen, Bagingski and Bradshaw *Financial Reporting, Financial Statement Analysis, and Valution, 7th ed.***Sales Growth Index (SGI) is:**

SGI = Sales_{t} / Sales_{t-1}**Depreciation Index (DEPI) is:**

DEPI = (Depreciation_{t-1}/ (PP&E_{t-1} + Depreciation_{t-1})) / (Depreciation_{t} / (PP&E_{t} + Depreciation_{t}))

NOTE: YCharts uses Depreciation and Amortization in place of Depreciation because of how our data items are aggregated, so companies with large amortization costs will differ slightly from the true M-Score.**SG&A Expense Index (SGAI) is:**

SGAI = (SG&A Expense_{t} / Sales_{t}) / (SG&A Expense_{t-1} / Sales_{t-1})**Leverage index (LVGI) is:**

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}]**Total Accruals to Total Assets (TATA) is:**

TATA = (Income from Continuing Operations_{t} - Cash Flows from Operations_{t}) / Total Assets_{t}