Wayfair 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 Wayfair 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 * 0.9588 | + | 0.528 * 0.8568 | + | 0.404 * 0.6078 | + | 0.892 * 1.5112 | + | 0.115 * 0.7583 |
| - | 0.172 * SGAI | + | 4.679 * TATA | - | 0.327 * LVGI |
| - | 0.172 * 0.8646 | + | 4.679 * -0.2916 | - | 0.327 * 1.0653 |
| = | -3.69 |
* 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 $110 Mil.
Revenue was 3839.57 + 4304.672 + 2330.063 + 2533.49 = $13,008 Mil.
Gross Profit was 1147.428 + 1321.03 + 579.123 + 577.355 = $3,625 Mil.
Total Current Assets was $3,043 Mil.
Total Assets was $4,558 Mil.
Property, Plant and Equipment(Net PPE) was $1,484 Mil.
Depreciation, Depletion and Amortization(DDA) was $267 Mil.
Selling, General, & Admin. Expense(SGA) was $3,671 Mil.
Total Current Liabilities was $2,217 Mil.
Long-Term Debt & Capital Lease Obligation was $3,730 Mil.
Net Income was 173.166 + 273.877 + -285.865 + -330.222 = $-169 Mil.
Non Operating Income was -13.584 + 3.11 + -0.246 + -2.701 = $-13 Mil.
Cash Flow from Operations was 331.027 + 1135.251 + -256.29 + -36.295 = $1,174 Mil.
|
Accounts Receivable was $76 Mil.
Revenue was 2305.487 + 2343.251 + 1944.829 + 2014.004 = $8,608 Mil.
Gross Profit was 539.921 + 559.6 + 470.456 + 485.122 = $2,055 Mil.
Total Current Assets was $1,671 Mil.
Total Assets was $3,008 Mil.
Property, Plant and Equipment(Net PPE) was $1,304 Mil.
Depreciation, Depletion and Amortization(DDA) was $170 Mil.
Selling, General, & Admin. Expense(SGA) was $2,809 Mil.
Total Current Liabilities was $1,434 Mil.
Long-Term Debt & Capital Lease Obligation was $2,250 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) |
| = | (109.652 / 13007.795) | / | (75.677 / 8607.571) |
| = | 0.00842971 | / | 0.00879191 |
| | = | 0.9588 |
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) |
| = | (2055.099 / 8607.571) | / | (3624.936 / 13007.795) |
| = | 0.23875481 | / | 0.27867413 |
| | = | 0.8568 |
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 - (3043.466 + 1484.426) / 4558.44) | / | (1 - (1670.701 + 1303.772) / 3007.635) |
| = | 0.00670142 | / | 0.01102594 |
| | = | 0.6078 |
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 |
| = | 13007.795 | / | 8607.571 |
| | = | 1.5112 |
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)) |
| = | (170.288 / (170.288 + 1303.772)) | / | (266.779 / (266.779 + 1484.426)) |
| = | 0.11552311 | / | 0.15234025 |
| | = | 0.7583 |
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) |
| = | (3670.573 / 13007.795) | / | (2809.224 / 8607.571) |
| = | 0.28218257 | / | 0.32636664 |
| | = | 0.8646 |
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) |
| = | ((3729.846 + 2217.353) / 4558.44) | / | ((2249.788 + 1433.659) / 3007.635) |
| = | 1.30465664 | / | 1.22469881 |
| | = | 1.0653 |
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 |
| = | (-169.044 - -13.421 | - | 1173.693) | / | 4558.44 |
| | = | -0.2916 |
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.
Wayfair has a M-score of -3.69 suggests that the company is unlikely to be a manipulator.
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