The Beneish M-score is a mathematical model that uses eight ratios, including ratios weighted by ratios, to determine if a company has been manipulating its profit. Beneisch believes that companies tend to manipulate their profits if they have high sales growth, worsening gross margins, higher operating expenses, and increased leverage. They can manipulate profits by speeding up sales recognition, increasing deferral of costs, increasing accruals, and decreasing depreciation.
Beneish M Score = -4.840 + 0.920 x DSRI + 0.528 x GMI + 0.404 x AQ + 0.892 x SGI + 0.115 x DEPI - 0.172 x SGAI - 0.327 x LVGI + 4.697 x TATA
If the value of the Beneish M-score is less than -2.22, there is the likelihood that the company is manipulating its profit.