Ares Capital 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 Ares Capital 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 * 0.7033 | + | 0.528 * 1 | + | 0.404 * 0.9883 | + | 0.892 * 2.0618 | + | 0.115 * 1 |
| - | 0.172 * SGAI | + | 4.679 * TATA | - | 0.327 * LVGI |
| - | 0.172 * 0.5361 | + | 4.679 * 0.042479 | - | 0.327 * 0.9232 |
| = | -1.51 |
* 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 $261 Mil.
Revenue was 444 + 528 + 361 + 302 = $1,635 Mil.
Gross Profit was 444 + 528 + 361 + 302 = $1,635 Mil.
Total Current Assets was $796 Mil.
Total Assets was $23,800 Mil.
Property, Plant and Equipment(Net PPE) was $10 Mil.
Depreciation, Depletion and Amortization(DDA) was $0 Mil.
Selling, General, & Admin. Expense(SGA) was $42 Mil.
Total Current Liabilities was $664 Mil.
Long-Term Debt & Capital Lease Obligation was $11,935 Mil.
Net Income was 413 + 500 + 331 + 278 = $1,522 Mil.
Non Operating Income was 0 + 0 + 0 + 0 = $0 Mil.
Cash Flow from Operations was -359 + 46 + -48 + 872 = $511 Mil.
|
Total Receivables was $180 Mil.
Revenue was 214 + 144 + 143 + 292 = $793 Mil.
Gross Profit was 214 + 144 + 143 + 292 = $793 Mil.
Total Current Assets was $483 Mil.
Total Assets was $22,398 Mil.
Property, Plant and Equipment(Net PPE) was $20 Mil.
Depreciation, Depletion and Amortization(DDA) was $0 Mil.
Selling, General, & Admin. Expense(SGA) was $38 Mil.
Total Current Liabilities was $523 Mil.
Long-Term Debt & Capital Lease Obligation was $12,320 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) |
| = | (261 / 1635) | / | (180 / 793) |
| = | 0.159633 | / | 0.226986 |
| | = | 0.7033 |
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) |
| = | (793 / 793) | / | (1635 / 1635) |
| = | 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 - (796 + 10) / 23800) | / | (1 - (483 + 20) / 22398) |
| = | 0.966134 | / | 0.977543 |
| | = | 0.9883 |
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 |
| = | 1635 | / | 793 |
| | = | 2.0618 |
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)) |
| = | (0 / (0 + 20)) | / | (0 / (0 + 10)) |
| = | 0 | / | 0 |
| | = | 1 |
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) |
| = | (42 / 1635) | / | (38 / 793) |
| = | 0.025688 | / | 0.047919 |
| | = | 0.5361 |
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) |
| = | ((11935 + 664) / 23800) | / | ((12320 + 523) / 22398) |
| = | 0.52937 | / | 0.573399 |
| | = | 0.9232 |
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 |
| = | (1522 - 0 | - | 511) | / | 23800 |
| | = | 0.042479 |
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.
Ares Capital has a M-score of -1.51 signals that the company is likely to be a manipulator.
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