GLOSSARY // Fundamentals
Beneish M-Score
The Beneish M-Score estimates the probability that a company is manipulating its reported earnings, using eight year-over-year ratios that tend to distort when the books are being stretched. Professor Messod Beneish published the model in 1999; a score above -1.78 flags a likely manipulator, and more negative scores are cleaner.
The eight variables: DSRI (days sales in receivables index — receivables growing faster than sales), GMI (gross margin index — deteriorating margins), AQI (asset quality index — rising soft assets), SGI (sales growth index — growth itself is a risk factor), DEPI (depreciation index — slowing depreciation), SGAI (SG&A index), LVGI (leverage index), and TATA (total accruals to total assets — earnings not backed by cash). The published weights: 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.
The model's calling card: a group of Cornell students applying it flagged Enron in 1998, two years before the collapse. Its honest limits — it was fit on manipulators caught in the late 1980s and early 1990s, it does not apply to financial companies, and fast-but-clean growers can trip the SGI and DSRI components. A bad M-Score is a reason to read the filings line by line, not a conviction.
A company's receivables were 15% of sales last year and 20% this year: DSRI = 0.20 / 0.15 = 1.33, meaning receivables grew a third faster than the sales they supposedly came from. Enough moves like that across the eight inputs push a company from a clean -2.50 toward the -1.78 line; a firm scoring -1.42 sits in flagged territory.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.