Guidewire Software 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 Guidewire Software 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 * 0.9083 | + | 0.528 * 0.9931 | + | 0.404 * 0.8992 | + | 0.892 * 1.0845 | + | 0.115 * 1.0657 |
| - | 0.172 * SGAI | + | 4.679 * TATA | - | 0.327 * LVGI |
| - | 0.172 * 1.0212 | + | 4.679 * -0.0614 | - | 0.327 * 1.026 |
| = | -2.83 |
* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.
| This Year (Oct20) TTM: | Last Year (Oct19) TTM: |
Accounts Receivable was $78.3 Mil.
Revenue was 169.802 + 243.674 + 168.165 + 173.458 = $755.1 Mil.
Gross Profit was 78.835 + 155.863 + 82.413 + 89.862 = $407.0 Mil.
Total Current Assets was $1,349.1 Mil.
Total Assets was $2,339.0 Mil.
Property, Plant and Equipment(Net PPE) was $175.8 Mil.
Depreciation, Depletion and Amortization(DDA) was $42.3 Mil.
Selling, General, & Admin. Expense(SGA) was $231.2 Mil.
Total Current Liabilities was $185.6 Mil.
Long-Term Debt & Capital Lease Obligation was $459.1 Mil.
Net Income was -20.19 + 38.775 + -31.038 + -19.944 = $-32.4 Mil.
Non Operating Income was 2.568 + 5.584 + -12.356 + -0.182 = $-4.4 Mil.
Cash Flow from Operations was -15.707 + 107.159 + 4.571 + 19.474 = $115.5 Mil.
|
Accounts Receivable was $79.5 Mil.
Revenue was 157.01 + 207.858 + 162.867 + 168.534 = $696.3 Mil.
Gross Profit was 76.154 + 125.074 + 82.589 + 88.854 = $372.7 Mil.
Total Current Assets was $1,189.7 Mil.
Total Assets was $2,199.0 Mil.
Property, Plant and Equipment(Net PPE) was $158.1 Mil.
Depreciation, Depletion and Amortization(DDA) was $41.2 Mil.
Selling, General, & Admin. Expense(SGA) was $208.7 Mil.
Total Current Liabilities was $164.7 Mil.
Long-Term Debt & Capital Lease Obligation was $426.1 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) |
| = | (78.295 / 755.099) | / | (79.48 / 696.269) |
| = | 0.10368839 | / | 0.11415128 |
| | = | 0.9083 |
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) |
| = | (372.671 / 696.269) | / | (406.973 / 755.099) |
| = | 0.53523997 | / | 0.53896641 |
| | = | 0.9931 |
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 - (1349.095 + 175.794) / 2338.957) | / | (1 - (1189.725 + 158.113) / 2199.024) |
| = | 0.34804744 | / | 0.38707445 |
| | = | 0.8992 |
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 |
| = | 755.099 | / | 696.269 |
| | = | 1.0845 |
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)) |
| = | (41.187 / (41.187 + 158.113)) | / | (42.292 / (42.292 + 175.794)) |
| = | 0.2066583 | / | 0.1939235 |
| | = | 1.0657 |
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) |
| = | (231.172 / 755.099) | / | (208.743 / 696.269) |
| = | 0.30614794 | / | 0.29980223 |
| | = | 1.0212 |
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) |
| = | ((459.079 + 185.623) / 2338.957) | / | ((426.101 + 164.686) / 2199.024) |
| = | 0.27563653 | / | 0.26865873 |
| | = | 1.026 |
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 |
| = | (-32.397 - -4.386 | - | 115.497) | / | 2338.957 |
| | = | -0.0614 |
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.
Guidewire Software has a M-score of -2.83 suggests that the company is unlikely to be a manipulator.
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