Can someone explain why the Earnings Manipulation Risk (Beneish M-Score) is low for Tesco? Am I missing a link here!!! Cheers
Hi, I see you raised a Help ticket on this and we did reply, but just in case you didn't get the reply (spam/junk filters sometimes get in the way), I'll copy the reply here....
The M-Score is not fool-proof, it's just one way to try to assess the risk of earnings manipulation. In his out of sample tests, Beneish found that he could correctly identify 76% of manipulators, whilst only incorrectly identifying 17.5% of non-manipulators. We explain how it works here:
1) http://www.stockopedia.com/content/the-beneish-m-score-identifying-earnings-management-and-short-candidates-56823/
2) http://help.stockopedia.com/knowledgebase/articles/358528-i-don-t-agree-with-the-beneish-m-score-for-company
TBH, I am quite surprised that it didn't flag here actually since, as I understand it, the Tesco issue primarily relates to the fact that accruals were carried back into the current financial period and liabilities deferred to boost the interim results by £250m, and that's the kind of thing Beneish focuses on, using TATA (Total Accruals to Total Assets).
One issue is that we only publish the M-Score on a last reported annual basis, not on a TTM basis. This is because of the paucity of some interim disclosure make it hard to calculate the score consistently. Having said that, we do have the M-Score calculated for Tesco on a TTM basis in our database (including the interims). Again, it's below the threshold level, -2.60 versus a threshold of -1.78.
Unfortunately, there will always be some exceptions to any quantitative-based approach, which is why DYOR and wide diversification is so important.
