Ratios and FormulaThe Beneish M score calculator uses eight ratios to evaluate companies.
Day Sales in Receivables Index (DSRI): (Accounts Receivablest/Salest*Number of Days) / (Accounts Receivablest-1/Salest-1*Number of Days)
- Note: the original formula uses 'net receivables' instead of 'accounts receivables' but it is not always easy to find this information, so it is substituted with accounts receivables instead. Additionally, 'net credit sales' is often not available in a company's financial statements, so sales' is used instead
Gross Margin Index (GMI): [Salest-1 - COGSt-1)/Salest-1] / [Salest - COGSt)/Salest]
Asset Quality Index (AQI): [1 - ((Current Assetst + PP&Et + Total Long-term Investmentst)/Total Assetst)] / [1 - ((Current Assetst-1 + PP&Et-1 + Total Long-term Investmentst-1) / Total Assetst-1)]
- Note: 'total long-term investments' is sometimes referred to as 'securities'
Sales Growth Index (SGI): Salest / Salest-1
Depreciation Index (DEPI): (Depreciationt-1/(PP&Et-1 + Depreciationt-1)) / (Depreciationt/(PP&Et + Depreciationt))
Selling, General, & Admin. Expenses Index (SGAI): (SG&A Expenset/Salest) / (SG&A Expenset-1/Salest-1)
Leverage Index (LVGI): [(Current Liabilitiest + Total Long-term Debtt)/Total Assetst] / [(Current Liabilitiest-1 + Total Long-term Debtt-1) / Total Assetst-1]
Total Accruals to Total Assets (TATA): (Income from Continuing Operationst - Cash Flow from Operationst) / Total Assetst
- Note: 'net income' can act as a substitute for 'income from continuing operations' if the company does not disclose non-recurring income
Interpreting the Beneish M ScoreThe final score outputted by the Beneish M score calculator is simple to interpret. The score shows if the company you are evaluating is likely to have manipulated their earnings using accounting tricks. However, remember that this calculator only outputs a predictive conclusion. The Beneish M score calculator does not concretely define or determine whether the company has manipulated its earnings. It only determines if it is likely that the company has done so. There are two conclusions that are implied from the M score:
- Beneish M Score < -2.22: Company is not likely to have manipulated their earnings
- Beneish M Score > -2.22: Company is likely to have manipulated their earnings