Electronic Arts 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 Electronic Arts 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 * 0.4494 | + | 0.528 * 0.9864 | + | 0.404 * 0.9395 | + | 0.892 * 1.0995 | + | 0.115 * 0.9667 |
| - | 0.172 * SGAI | + | 4.679 * TATA | - | 0.327 * LVGI |
| - | 0.172 * 0.9397 | + | 4.679 * -0.0595 | - | 0.327 * 0.9462 |
| = | -3.18 |
* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.
| This Year (Sep20) TTM: | Last Year (Sep19) TTM: |
Accounts Receivable was $423 Mil.
Revenue was 1151 + 1459 + 1387 + 1593 = $5,590 Mil.
Gross Profit was 865 + 1171 + 1118 + 1085 = $4,239 Mil.
Total Current Assets was $6,830 Mil.
Total Assets was $11,470 Mil.
Property, Plant and Equipment(Net PPE) was $458 Mil.
Depreciation, Depletion and Amortization(DDA) was $155 Mil.
Selling, General, & Admin. Expense(SGA) was $1,183 Mil.
Total Current Liabilities was $2,485 Mil.
Long-Term Debt & Capital Lease Obligation was $397 Mil.
Net Income was 185 + 365 + 418 + 346 = $1,314 Mil.
Non Operating Income was 1 + 8 + -75 + 21 = $-45 Mil.
Cash Flow from Operations was 61 + 378 + 498 + 1104 = $2,041 Mil.
|
Accounts Receivable was $856 Mil.
Revenue was 1348 + 1209 + 1238 + 1289 = $5,084 Mil.
Gross Profit was 943 + 1022 + 962 + 876 = $3,803 Mil.
Total Current Assets was $6,040 Mil.
Total Assets was $10,593 Mil.
Property, Plant and Equipment(Net PPE) was $442 Mil.
Depreciation, Depletion and Amortization(DDA) was $143 Mil.
Selling, General, & Admin. Expense(SGA) was $1,145 Mil.
Total Current Liabilities was $1,818 Mil.
Long-Term Debt & Capital Lease Obligation was $995 Mil.
|
1. DSRI = Days Sales in Receivables Index
Measured as the ratio of Revenue in Accounts Receivable 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) |
| = | (423 / 5590) | / | (856 / 5084) |
| = | 0.07567084 | / | 0.16837136 |
| | = | 0.4494 |
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) |
| = | (3803 / 5084) | / | (4239 / 5590) |
| = | 0.74803304 | / | 0.75831843 |
| | = | 0.9864 |
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 - (6830 + 458) / 11470) | / | (1 - (6040 + 442) / 10593) |
| = | 0.36460331 | / | 0.38808647 |
| | = | 0.9395 |
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 |
| = | 5590 | / | 5084 |
| | = | 1.0995 |
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)) |
| = | (143 / (143 + 442)) | / | (155 / (155 + 458)) |
| = | 0.24444444 | / | 0.25285481 |
| | = | 0.9667 |
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) |
| = | (1183 / 5590) | / | (1145 / 5084) |
| = | 0.21162791 | / | 0.22521637 |
| | = | 0.9397 |
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) |
| = | ((397 + 2485) / 11470) | / | ((995 + 1818) / 10593) |
| = | 0.25126417 | / | 0.26555272 |
| | = | 0.9462 |
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 |
| = | (1314 - -45 | - | 2041) | / | 11470 |
| | = | -0.0595 |
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.
Electronic Arts has a M-score of -3.18 suggests that the company is unlikely to be a manipulator.
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