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Understanding Montier C-Score

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Our earlier lesson dealt with two important scores in company equity share analysis. Understanding Altman Z-Score of companies which helps us understand the solvency of a company and later the [Understanding Piotroski F-Score|Piotroski F-Score] which spoke about overall financials about a company.

In today's session, we shall focus on James Montier's C-score.

The score can be used to determine if creative accounting was used in the financial results of the company.

James Montier C-score tells the probability of financial manipulations based on the quantitative method.

The Six Checks

There are 6 questions that need to be asked.

A Yes is given a 1-point while a No will be given a 0-point.

So, if a company C-Score is 0, it is superb while if it is 6, it means that creativity is understand in accounting and this is not a good sign.

The six questions are as follows:

1. Is there a growing divergence between net income and operating cash-flow?

This is based on the simple observation that earnings can be inflated, but cash flows are hard to manipulate.

2. Are Days Sales Outstanding (DSO) increasing?

When a company stuffs the dealer pipeline, this number increases.

3. Are days sales of inventory (DSI) increasing?

A sign of slowing sales.

4. Are other current assets increasing vs revenues?

Since managements know that DSO and/or DSI can be closely watched, they may use this to hide something.

5. Are there declines in depreciation relative to gross property plant and equipment?

Companies may alter their estimate of useful asset life to enhance reported earnings.

6. Is total asset growth high?

It has often been observed that high asset growth firms under perform.

Additional Checks

Value Research Online has added 3 more additional checks.

7. Are debtors as per cent to revenue increasing?

This means that the company is selling more on credit and realising not cash.

8. Is asset quality improving or declining?

Asset quality is measured as the ratio of non-current assets other than plant, property and equipment to total assets. Which means the company may have high non-productive assets.

9. Is accrual ratio high or low?

Total accruals calculated as the change in working capital accounts other than cash less depreciation. Accrual ratio gives the difference between the accrual accounting and cash actually made out of it. A high ratio means that there is a high difference between the cash realised and earnings reported.

How to find C-Score

Actually there are very few resources that take into account the computation related to James Montier C-score. is one such website that provides the details. However, they have added the additional checks and named it Modified Montier C-score.

Visit the website and sign up for free. Then do a search for your company and on the company page.

On the right part of the page, you will be able to locate Montier C-score.

For example, the Modified C-score for Infosys is 1.

So, we can say it is a good score

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