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 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 view our calculation 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