McDonald's 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 McDonald's 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 * 1.3221 | + | 0.528 * 1.0159 | + | 0.404 * 0.9119 | + | 0.892 * 0.9021 | + | 0.115 * 0.9763 |
| - | 0.172 * SGAI | + | 4.679 * TATA | - | 0.327 * LVGI |
| - | 0.172 * 1.3323 | + | 4.679 * -0.0274 | - | 0.327 * 0.9984 |
| = | -2.49 |
* 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 $2,392 Mil.
Revenue was 5418.1 + 3761.5 + 4714.4 + 5140.3 = $19,034 Mil.
Gross Profit was 2904.7 + 1725.3 + 2341.9 + 2803.6 = $9,776 Mil.
Total Current Assets was $6,736 Mil.
Total Assets was $50,699 Mil.
Property, Plant and Equipment(Net PPE) was $37,495 Mil.
Depreciation, Depletion and Amortization(DDA) was $1,701 Mil.
Selling, General, & Admin. Expense(SGA) was $2,394 Mil.
Total Current Liabilities was $6,280 Mil.
Long-Term Debt & Capital Lease Obligation was $47,879 Mil.
Net Income was 1762.6 + 483.8 + 1106.9 + 1572.2 = $4,926 Mil.
Non Operating Income was 149.6 + -115.5 + -32.6 + 152.2 = $154 Mil.
Cash Flow from Operations was 2939.5 + -213.1 + 1546 + 1889.3 = $6,162 Mil.
|
Accounts Receivable was $2,005 Mil.
Revenue was 5502.3 + 5409.8 + 5024.1 + 5163 = $21,099 Mil.
Gross Profit was 2917.6 + 2842.6 + 2551.5 + 2696.7 = $11,008 Mil.
Total Current Assets was $3,605 Mil.
Total Assets was $45,805 Mil.
Property, Plant and Equipment(Net PPE) was $35,791 Mil.
Depreciation, Depletion and Amortization(DDA) was $1,583 Mil.
Selling, General, & Admin. Expense(SGA) was $1,992 Mil.
Total Current Liabilities was $4,276 Mil.
Long-Term Debt & Capital Lease Obligation was $44,732 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) |
| = | (2391.8 / 19034.3) | / | (2005.3 / 21099.2) |
| = | 0.12565737 | / | 0.09504152 |
| | = | 1.3221 |
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) |
| = | (11008.4 / 21099.2) | / | (9775.5 / 19034.3) |
| = | 0.5217449 | / | 0.51357287 |
| | = | 1.0159 |
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 - (6736.1 + 37494.5) / 50699.3) | / | (1 - (3604.9 + 35790.9) / 45805) |
| = | 0.12758953 | / | 0.13992359 |
| | = | 0.9119 |
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 |
| = | 19034.3 | / | 21099.2 |
| | = | 0.9021 |
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)) |
| = | (1583.3 / (1583.3 + 35790.9)) | / | (1700.7 / (1700.7 + 37494.5)) |
| = | 0.04236345 | / | 0.04339052 |
| | = | 0.9763 |
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) |
| = | (2394.2 / 19034.3) | / | (1992 / 21099.2) |
| = | 0.12578345 | / | 0.09441116 |
| | = | 1.3323 |
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) |
| = | ((47879.4 + 6280.2) / 50699.3) | / | ((44731.9 + 4275.6) / 45805) |
| = | 1.06825144 | / | 1.06991595 |
| | = | 0.9984 |
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 |
| = | (4925.5 - 153.7 | - | 6161.7) | / | 50699.3 |
| | = | -0.0274 |
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.
McDonald's has a M-score of -2.49 suggests that the company is unlikely to be a manipulator.
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