The Earnings Manipulation Risk Indicator gives a visual representation of how likely it is that a company's management has been manipulating the accounts to inflate earnings. The indicator is based on the Beneish M-Score, a statistical measure derived from a set of 8 ratios drawn from a company's accounts. If the switch is on, Beneish's research implies a ~86% probability that the firm is manipulating earnings
J Sainsbury has an M-Score of -2.49. As the score is below -1.78, this indicates that the company is unlikely to be manipulating earnings.
The Beneish M-score is a classification model based on combining multiple ratios. However, the following tests give an indication for the key factors driving the M-score which can be used a starting point for further investigation.
Note: Beneish's original research was sector-agnostic (apart from excluding financial companies). However, because it relies on ratios like gross margin, it may be unavailable (or less meaningful) for sectors with atypical financial profiles, e.g. oil E&P companies.
Note also: The exact Beneish threshold varies depending on the relative error costs of missing out potential manipulators versus mis-classifying a non-manipulator (Type 1 vs. Type II). A -1.78 threshold implies a 13.8% chance of mis-classifying a non-manipulator, which Beneish suggests is a reasonable compromise level.
For further information on how the M-Score is calculated click here.
To view all the stocks with the worst M-Score record click here.