QualityM-Score#48
Earnings Quality expresses how efficiently a company converts capital into earnings.
By Javier Sanz, Founder & Lead AnalystEditorially reviewed
Last updated: Reviewed by: Javier Sanz
Formula
-4.84 + 0.92(DSRI) + 0.528(GMI) + 0.404(AQI) + 0.892(SGI) + 0.115(DEPI) - 0.172(SGAI) + 4.679(TATA) - 0.327(LVGI)
Description
Messod Beneish's earnings manipulation detection model, published in 1999. It uses eight financial ratios to flag companies that may be artificially inflating reported profits. The model famously identified Enron as a likely manipulator before its collapse.
Interpretation
Below -2.22: Low manipulation probability. Above -2.22: Higher probability of manipulation, investigate further. Not a guarantee of fraud but a useful screening tool. Pay extra attention when M-Score suddenly spikes from a historically low level.
Related metrics: Return on Equity (ROE), Return on Assets (ROA), Return on Invested Capital (ROIC). (Updated 2026)
Further Reading
- SEC EDGAR primary filings on Earnings Quality- Primary source filings used to calculate Earnings Quality.
FAQ
How is Earnings Quality calculated?+
Earnings Quality uses the formula: -4.84 + 0.92(DSRI) + 0.528(GMI) + 0.404(AQI) + 0.892(SGI) + 0.115(DEPI) - 0.172(SGAI) + 4.679(TATA) - 0.327(LVGI). compare against sector median on /screener with the Sector filter applied. ValueMarkers refreshes the calculation within 24 hours of each new SEC filing using SEC EDGAR 10-K + 10-Q filings (segment-level disclosures).
What is a good Earnings Quality value by sector?+
There is no single 'good' value for Earnings Quality — context is sector-driven. compare against sector median on /screener with the Sector filter applied. The /screener exposes sector-relative percentiles for Earnings Quality on every ticker, so you can compare against the sector median rather than the broad-market median.
Which investors use Earnings Quality?+
Charlie Munger, Joel Greenblatt, Terry Smith cite Earnings Quality as a key input to to find compounders with durable economic moats. The academic anchor is Greenblatt (2005) Magic Formula and Mauboussin (2014). ValueMarkers weights this within the Quality pillar of the VMCI score (30% of total).
What are the limitations of Earnings Quality?+
Earnings Quality can mislead in asset-light businesses where conventional capital ratios mislead. Pair Earnings Quality with at least two cross-checks from other VMCI pillars — for example, free cash flow trend, balance-sheet quality, and earnings consistency — before drawing a single-metric conclusion.
Where can I see live Earnings Quality data?+
Visit any /stock/[ticker] page on ValueMarkers to see live Earnings Quality data, sector percentiles, and the VMCI composite score that integrates Earnings Quality with 119 other indicators across 100,000+ stocks. The free /screener exposes Earnings Quality as a filterable column.
Used in these guides
Related Quality Indicators
Return on Equity (ROE)Op Margin
Return on Equity measures how efficiently a company converts capital into earnings.
Return on Assets (ROA)Net Margin
Return on Assets is the metric used to how efficiently a company converts capital into earnings.
Return on Invested Capital (ROIC)EBITDA Margin
Return on Invested Capital measures how efficiently a company converts capital into earnings.
Return on Capital Employed (ROCE)FCF Margin
Return on Capital Employed is the metric used to how efficiently a company converts capital into earnings.
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