First American Financial Beneish M-Score Calculation
The M-score was created by Professor Messod Beneish. Instead of measuring the bankruptcy risk (Altman Z-Score) or business trend (Piotroski F-Score), M-score can be used to detect the risk of earnings manipulation. This is the original research paper on M-score.
The M-Score Variables:
The M-score of First American Financial for today is based on a combination of the following eight different indices:
| M | = | -4.84 | + | 0.92 * DSRI | + | 0.528 * GMI | + | 0.404 * AQI | + | 0.892 * SGI | + | 0.115 * DEPI |
| = | -4.84 | + | 0.92 * 1.9039 | + | 0.528 * 1 | + | 0.404 * 0.8314 | + | 0.892 * 0.7898 | + | 0.115 * 0.9857 |
| - | 0.172 * SGAI | + | 4.679 * TATA | - | 0.327 * LVGI |
| - | 0.172 * 1.0764 | + | 4.679 * -0.064037 | - | 0.327 * 0.8475 |
| = | -2.17 |
* For Operating Data section: All numbers are indicated by the unit behind each term and all currency related amount are in USD.
* For other sections: All numbers are in millions except for per share data, ratio, and percentage. All currency related amount are indicated in the company's associated stock exchange currency.
| This Year (Dec23) TTM: | Last Year (Dec22) TTM: |
Total Receivables was $585 Mil.
Revenue was 1423.9 + 1481.2 + 1646.9 + 1446.1 = $5,998 Mil.
Gross Profit was 1423.9 + 1481.2 + 1646.9 + 1446.1 = $5,998 Mil.
Total Current Assets was $4,246 Mil.
Total Assets was $16,803 Mil.
Property, Plant and Equipment(Net PPE) was $979 Mil.
Depreciation, Depletion and Amortization(DDA) was $189 Mil.
Selling, General, & Admin. Expense(SGA) was $1,989 Mil.
Total Current Liabilities was $1,350 Mil.
Long-Term Debt & Capital Lease Obligation was $1,341 Mil.
Net Income was 34.1 + -1.7 + 138.5 + 45.9 = $217 Mil.
Non Operating Income was 215.6 + 245.7 + 250.3 + 226.9 = $939 Mil.
Cash Flow from Operations was -41.7 + 219.3 + 269 + -92.3 = $354 Mil.
|
Total Receivables was $389 Mil.
Revenue was 1673.7 + 1824.3 + 2062.5 + 2033.7 = $7,594 Mil.
Gross Profit was 1673.7 + 1824.3 + 2062.5 + 2033.7 = $7,594 Mil.
Total Current Assets was $1,676 Mil.
Total Assets was $14,955 Mil.
Property, Plant and Equipment(Net PPE) was $885 Mil.
Depreciation, Depletion and Amortization(DDA) was $168 Mil.
Selling, General, & Admin. Expense(SGA) was $2,340 Mil.
Total Current Liabilities was $1,464 Mil.
Long-Term Debt & Capital Lease Obligation was $1,361 Mil.
|
1. DSRI = Days Sales in Receivables Index
Measured as the ratio of Revenue in Total Receivables in year t to year t-1.
A large increase in DSR could be indicative of revenue inflation.
| DSRI | = | (Receivables_t / Revenue_t) | / | (Receivables_t-1 / Revenue_t-1) |
| = | (585.1 / 5998.1) | / | (389.1 / 7594.2) |
| = | 0.097548 | / | 0.051236 |
| | = | 1.9039 |
2. GMI = Gross Margin Index
Measured as the ratio of gross margin in year t-1 to gross margin in year t.
Gross margin has deteriorated when this index is above 1. A firm with poorer prospects is more likely to manipulate earnings.
| GMI | = | GrossMargin_t-1 | / | GrossMargin_t |
| = | (GrossProfit_t-1 / Revenue_t-1) | / | (GrossProfit_t / Revenue_t) |
| = | (7594.2 / 7594.2) | / | (5998.1 / 5998.1) |
| = | 1 | / | 1 |
| | = | 1 |
3. AQI = Asset Quality Index
AQI is the ratio of asset quality in year t to year t-1.
Asset quality is measured as the ratio of non-current assets other than Property, Plant and Equipment to Total Assets.
| AQI | = | (1 - (CurrentAssets_t + PPE_t) / TotalAssets_t) | / | (1 - (CurrentAssets_t-1 + PPE_t-1) / TotalAssets_t-1) |
| = | (1 - (4246.2 + 978.9) / 16802.8) | / | (1 - (1676 + 884.9) / 14955.3) |
| = | 0.689034 | / | 0.828763 |
| | = | 0.8314 |
4. SGI = Sales Growth Index
Ratio of Revenue in year t to sales in year t-1.
Sales growth is not itself a measure of manipulation. However, growth companies are likely to find themselves under pressure to manipulate in order to keep up appearances.
| SGI | = | Sales_t | / | Sales_t-1 |
| = | Revenue_t | / | Revenue_t-1 |
| = | 5998.1 | / | 7594.2 |
| | = | 0.7898 |
5. DEPI = Depreciation Index
Measured as the ratio of the rate of Depreciation, Depletion and Amortization in year t-1 to the corresponding rate in year t.
DEPI greater than 1 indicates that assets are being depreciated at a slower rate. This suggests that the firm might be revising useful asset life assumptions upwards, or adopting a new method that is income friendly.
| DEPI | = | (Depreciation_t-1 / (Depreciaton_t-1 + PPE_t-1)) | / | (Depreciation_t / (Depreciaton_t + PPE_t)) |
| = | (167.5 / (167.5 + 884.9)) | / | (188.5 / (188.5 + 978.9)) |
| = | 0.15916 | / | 0.16147 |
| | = | 0.9857 |
Note: If the Depreciation, Depletion and Amortization data is not available, we assume that the depreciation rate is constant and set the Depreciation Index to 1.
6. SGAI = Sales, General and Administrative expenses Index
The ratio of Selling, General, & Admin. Expense(SGA) to Sales in year t relative to year t-1.
SGA expenses index > 1 means that the company is becoming less efficient in generate sales.
| SGAI | = | (SGA_t / Sales_t) | / | (SGA_t-1 /Sales_t-1) |
| = | (1989.1 / 5998.1) | / | (2339.6 / 7594.2) |
| = | 0.331622 | / | 0.308077 |
| | = | 1.0764 |
7. LVGI = Leverage Index
The ratio of total debt to Total Assets in year t relative to yeat t-1.
An LVGI > 1 indicates an increase in leverage
| LVGI | = | ((LTD_t + CurrentLiabilities_t) / TotalAssets_t) | / | ((LTD_t-1 + CurrentLiabilities_t-1) / TotalAssets_t-1) |
| = | ((1340.5 + 1349.5) / 16802.8) | / | ((1361.1 + 1464) / 14955.3) |
| = | 0.160092 | / | 0.188903 |
| | = | 0.8475 |
8. TATA = Total Accruals to Total Assets
Total accruals calculated as the change in working capital accounts other than cash less depreciation.
| TATA | = | (IncomefromContinuingOperations_t | - | CashFlowsfromOperations_t) | / | TotalAssets_t |
| = | (NetIncome_t - NonOperatingIncome_t | - | CashFlowsfromOperations_t) | / | TotalAssets_t |
| = | (216.8 - 938.5 | - | 354.3) | / | 16802.8 |
| | = | -0.064037 |
An M-Score of equal or less than -1.78 suggests that the company is unlikely to be a manipulator. An M-Score of greater than -1.78 signals that the company is likely to be a manipulator.
First American Financial has a M-score of -2.17 suggests that the company is unlikely to be a manipulator.
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