Northern Trust 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 Northern Trust 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 * 0.125 | + | 0.528 * 1 | + | 0.404 * 1.2791 | + | 0.892 * 1.0019 | + | 0.115 * 0.9408 |
| - | 0.172 * SGAI | + | 4.679 * TATA | - | 0.327 * LVGI |
| - | 0.172 * 1.044 | + | 4.679 * -0.010069 | - | 0.327 * 1.1132 |
| = | -3.27 |
* 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 $213 Mil.
Revenue was 1545.3 + 1726.5 + 1752.8 + 1744.6 = $6,769 Mil.
Gross Profit was 1545.3 + 1726.5 + 1752.8 + 1744.6 = $6,769 Mil.
Total Current Assets was $51,370 Mil.
Total Assets was $150,783 Mil.
Property, Plant and Equipment(Net PPE) was $502 Mil.
Depreciation, Depletion and Amortization(DDA) was $635 Mil.
Selling, General, & Admin. Expense(SGA) was $2,912 Mil.
Total Current Liabilities was $0 Mil.
Long-Term Debt & Capital Lease Obligation was $13,406 Mil.
Net Income was 113.1 + 327.8 + 331.8 + 334.6 = $1,107 Mil.
Non Operating Income was 0 + 0 + 0 + 0 = $0 Mil.
Cash Flow from Operations was 2803.2 + 86.7 + -99.4 + -164.9 = $2,626 Mil.
|
Total Receivables was $1,698 Mil.
Revenue was 1519 + 1754.8 + 1764.1 + 1718.7 = $6,757 Mil.
Gross Profit was 1519 + 1754.8 + 1764.1 + 1718.7 = $6,757 Mil.
Total Current Assets was $75,024 Mil.
Total Assets was $155,037 Mil.
Property, Plant and Equipment(Net PPE) was $501 Mil.
Depreciation, Depletion and Amortization(DDA) was $554 Mil.
Selling, General, & Admin. Expense(SGA) was $2,784 Mil.
Total Current Liabilities was $0 Mil.
Long-Term Debt & Capital Lease Obligation was $12,383 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) |
| = | (212.6 / 6769.2) | / | (1698.3 / 6756.6) |
| = | 0.031407 | / | 0.251354 |
| | = | 0.125 |
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) |
| = | (6756.6 / 6756.6) | / | (6769.2 / 6769.2) |
| = | 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 - (51369.7 + 502.2) / 150783.1) | / | (1 - (75023.9 + 500.5) / 155036.7) |
| = | 0.655983 | / | 0.512861 |
| | = | 1.2791 |
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 |
| = | 6769.2 | / | 6756.6 |
| | = | 1.0019 |
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)) |
| = | (553.6 / (553.6 + 500.5)) | / | (634.6 / (634.6 + 502.2)) |
| = | 0.525187 | / | 0.558234 |
| | = | 0.9408 |
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) |
| = | (2912.1 / 6769.2) | / | (2784.1 / 6756.6) |
| = | 0.430199 | / | 0.412056 |
| | = | 1.044 |
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) |
| = | ((13406 + 0) / 150783.1) | / | ((12382.7 + 0) / 155036.7) |
| = | 0.088909 | / | 0.079869 |
| | = | 1.1132 |
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 |
| = | (1107.3 - 0 | - | 2625.6) | / | 150783.1 |
| | = | -0.010069 |
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.
Northern Trust has a M-score of -3.27 suggests that the company is unlikely to be a manipulator.
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