Definition: The Beneish M-Score is a mathematical model created at the end of the 20^th Century by Professor Messod Beneish to identify if a company has manipulated its earnings. The model includes eight financial ratios constructed with data taken from the company’s financial statements and weighted by coefficients.

Investors and financial analysts who want to identify potential manipulations of financial results are the main users of the Beneish M-Score.

In short, it is used as a fraud detection technique. Since the financial results are the key input to decide whether or not to favor a potential investment, senior managers are strongly tempted to apply accounting policies as a way to artificially inflate short-term profits.

The result of the M-Score is a number that indicates the degree to which the earnings have been manipulated. According to Beneish, companies tend to manipulate profits if they have high sales growth, deteriorating gross margins, rising operating expenses, and rising leverage.

They are likely to manipulate profits by accelerating sales recognition, increasing cost deferrals, raising accruals, and reducing depreciation.

Key Takeaways

Beneish M-Score Formula

The M-Score is calculated through the following formula:

M-score = -4.840 + 0.920 * DSRI + 0.528 * GMI + 0.404 * AQ + 0.892 * SGI + 0.115 * DEPI – 0.172 * SGAI – 0.327 * LVGI + 4.697 * TATA

Where

Components of the Beneish M-Score Formula

DSRI = Day Sales Receivable Index. It measures the ratio of days’ sales in receivables versus prior year. When Days Receivable increase notably, it might indicate accelerated income recognition to inflate earnings.

GMI = Gross Margin Index. It is calculated as the ratio of gross margin versus prior year. When gross margin is decreasing the firm is incentivized to inflate profits as a way to avoid worrying signals to investors.

AQ = Asset Quality Index. This is estimated as the ratio of non-current assets to total assets, but excluding from non-current assets the business’ plants, properties and equipment. This ratio measures asset quality compared to the previous year. An increase in long term assets other than property plant and equipment, relative to total assets indicates that a firm has potentially increased its involvement in cost deferral to inflate profits.

SGI = Sales Growth Index. This calculates sales growth versus previous year figure. Although high sales growth is not and indication of manipulation itself, the model assumes that high growth companies are more probable to commit financial fraud. This happens because their capital needs put pressure on managers to achieve good financial results.

DEPI = Depreciation Index. This calculates the ratio of the rate of depreciation versus previous year. A falling level of depreciation relative to net fixed assets raises the possibility that a firm has increased the useful life of its assets above the recommended standard, or adopted a new method of estimating their depreciation estimations to increase profits.

SGAI = Selling, General and Administrative Expenses Index. This measures the ratio of SGA expenses compared to the previous year. When there is a large increase in SG&A relative to sales, companies have higher incentives to inflate profits as a way to avoid negative signals.

LVGI = Leverage Index. This calculates the ratio of total debt to total assets versus the previous year. Leverage is seen as total debt relative to total assets. When leverage is rising, managers have incentives to manipulate profits to maintain the image that the business is solvent.

TATA = Total Accruals to Total Assets. This metric assesses the extent to which managers make discretionary accounting choices to alter earnings. Total accruals are calculated as the change in working capital (other than cash) less depreciation relative to total assets. Accruals, or a portion thereof, reflect the extent to which managers make discretionary accounting choices to alter earnings.

Four of the elements measure earnings manipulation (DSR, AQI, DEPI and TATA) and the remaining four indicate a predisposition to engage in earnings manipulation (GMI, SGI, SGAI, LEVI).

The Beneish M-Score says that when a company obtains a score greater than -2.22, which means that it may be a less negative or a positive number, it is more likely that it may be manipulating its accounting to inflate earnings.

Beneish M-Score Example

Let’s analyze two hypothetical companies to apply the Beneish M-Score formula.

Company A has the following financial ratios.

DSRI = 1.6

GMI = 1.1

AQ = 0.99

SGI = 0.7

DEPI = 1.02

SGAI = 1.15

LVGI = 0.5

TATA = -1

M-score = -4.840 + 0.920 * 1.6 + 0.528 * 1.1 + 0.404 * 0.99 + 0.892 * 0.7 + 0.115 * 1.02 – 0.172 * 1.15 – 0.327 * 0.5 + 4.697 * -1 = -6.7

The result indicates that Company A has not manipulated its earnings, as the number is lower than -2.22

Company B has the following financial ratios.

DSRI = 2

GMI = 2.2

AQ = 0.98

SGI = 0.7

DEPI = 1.02

SGAI = 0.2

LVGI = 0.1

TATA = -0.1

M-score = -4.840 + 0.920 * 2 + 0.528 * 2.2 + 0.404 * 0.98 + 0.892 * 0.7 + 0.115 * 1.02 – 0.172 * 0.2 – 0.327 * 0.1 + 4.697 * -0.1 = -1.24

For Company B, the Beneish M-Score indicates that earnings have probably been manipulated, as the number is higher than -2.22

How to Interpret the Beneish M-Score Analysis

The Beneish M-Score states that a company with a result higher -2.22 is more likely to be engaged in the manipulation of its reported earnings. On the opposite side, a company with a result under -2.22 is more likely to be transparently reporting its results.

To test the model, Professor Beneish used all companies in the Compustat database between 1982 and 1992. After running the test, the results were good yet not perfect.

The model could rightly find 76% of the manipulators and wrongly identified 17.5% of non-manipulators. Students of Cornell University applied the model to Enron and correctly identified that corporation as a manipulator.

Cautions & Limitations

Due to the risk of being wrong, the Beneish M-Score should be used as a mere approximation to detect potential earnings manipulation. It is certainly useful but an investor should not make a final decision on an investment by only using this method.

More thorough analysis of the company’s books should serve as a complement to any definitive conclusion. In the example shown above, an analyst should look carefully at Company B to evaluate if the business is actually a good investment alternative, considering it may be engaged in this sort of manipulation.

Frequently Asked Questions

What is the Beneish M-Score and how is it used?

The Beneish M-Score is a mathematical model that uses eight financial ratios to identify the likelihood of a company manipulating its earnings. It serves as a tool for investors and analysts to assess the risk of earnings manipulation, with a score higher than -2.22 suggesting a high probability of manipulation.

Can the Beneish M-Score predict financial fraud in companies?

While the Beneish M-Score is designed to detect signs of earnings manipulation, it’s not foolproof in predicting financial fraud but significantly aids in raising red flags for further investigation, based on statistical analysis of accounting data.

How does the Beneish M-Score differ from traditional financial analysis?

The Beneish M-Score specifically targets the detection of earnings manipulation by examining changes in key financial ratios over time, unlike traditional financial analysis that might focus more broadly on evaluating financial health, performance, and future prospects of a company.

Is the Beneish M-Score applicable to all types of companies?

The Beneish M-Score is most effective with publicly traded companies due to the availability of detailed financial information required for its calculation; however, its applicability and accuracy can vary across different industries and sizes of companies, with some sectors potentially having naturally higher scores without engaging in manipulation.

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Both the Basic EPS and the Diluted EPS can be found at the bottom of the Income Statement and they reflect the profitability of the business per each share outstanding.

Investors and shareholders commonly analyze the evolution of both EPS metrics over time in order to determine if the company has been improving its performance. An upward trend on a company’s EPS indicates that it has been able to produce larger profits, and the opposite is also true.

On the other hand, a company’s EPS is affected by the number of shares outstanding. If a company has issued new shares and the Net Income remains the same, the EPS will go down.

In turn, if the company has bought back some shares and the Net Income remains unaltered, its EPS will go up. Finally, the Diluted EPS indicates the resulting EPS assuming that the company’s dilutive securities were all exercised.

Investors can use this EPS indicator to analyze the impact that dilutive securities have on the per share profitability, which affects the return on investment for existing shareholders.

What is Basic Earnings Per Share?

Basic Earnings Per Share (EPS) is a financial metric that calculates the amount of a company’s profit allocated to each outstanding share of common stock, serving as an indicator of the company’s profitability on a per-share basis.

It is computed by dividing the net income (after dividends on preferred stock) by the total number of outstanding shares. Basic EPS provides a straightforward measure of a company’s earnings relative to its shares, helping investors gauge its financial performance and profitability.

What is Diluted Earnings Per Share?

Diluted Earnings Per Share (EPS) is a financial metric that calculates a company’s earnings per share (EPS) assuming all convertible securities, such as convertible bonds, options, and warrants, were converted into common stock.

It provides a conservative view of a company’s profitability by showing the lowest possible earnings per share if all potential shares that could dilute EPS were issued.

Diluted EPS takes into account the impact of these potential conversions and exercises on the total number of shares, offering investors insight into the potential dilution of earnings and a more comprehensive understanding of the company’s financial health.

Key Takeaways

Basic Earnings Per Share vs Diluted Earnings Per Share Formulas

The formula to calculate both the Basic EPS and the Diluted EPS are the following:

Basic EPS = (Net Income – Preferred Dividends) / Common Shares Outstanding

Diluted EPS = (Net Income – Preferred Dividends) / (Common Shares Outstanding + Effect of Dilutive Securities)

Where:

Net Income: The result of subtracting the cost of goods sold, operational expenses, financial charges and taxes from the company’s net revenues.

Common Shares Outstanding: Total common shares that are held by either individual or institutional investors.

Preferred Dividends: The total dividend paid to preferred shareholders for the time period under evaluation.

Effect of Dilutive Securities: The total number of shares that would be issued if the dilutive securities are fully exercised.

Basic EPS and Diluted EPS Examples

Black Gems is a coal mining company that operates in 5 different locations in the United States. The company is publicly traded and therefore it has to publish quarterly and annual financial statements containing the details of its operations and its financial performance.

The latest financial report issued by the company shown the following information:

(in thousands)

Net Income: $354,931

Preferred Dividends: $28,330

Common Shares Outstanding: 12,500

Stock Options: 300

Stock Warrants: 60

Each option and warrant entitles the holder to one common share of the company if the derivative is exercised.

As a result, the Basic and Diluted EPS for Black Gems would be the following:

Basic EPS = ($354,931 – $28,330) / 12,500 = $26.2

Diluted EPS = ($354,931 – $28,330) / (12,500 + 300 + 60) = $25.4

This means that the EPS would be diluted 3.1% if the dilutive shares were exercised.

Basic vs Diluted EPS Analysis

The Basic EPS and Diluted EPS track the profitability of the business on a per share basis. Investors can rely on the EPS to understand how the performance of the company has fluctuated over time regardless of the new equity it has issued.

This gives investors a clearer understanding, as the Net Income by itself could be expanded as a result of new investments but by itself it doesn’t transmit if investors are actually obtaining more money per each share they hold.

Ideally, Earnings per Share should grow in line with the additional equity investments. If a business increases its equity by 20%, its EPS should grow by at least 20% during a reasonable period of time. If the business’ EPS grows by a lower percentage the EPS will end up being lower than it was previously and investors won’t be benefited from the additional investment.

On other hand, businesses can also use leverage as a way to increase its profits without affect the company’s ownership structure or equity capital. Even though that may be reasonable under certain circumstances, taking too much debt to finance growth can increase the company’s financial risk, as any market or financial downturn can jeopardize its profitability.

The Diluted EPS will always be equal or lower than the company’s Basic EPS, as the effect of dilutive shares expand the number of shares outstanding. If a company consistently issues stock options, warrants and convertible issues, investors will be affected as the Basic EPS will be significantly diluted by these dilutive securities.

Companies usually issue these derivatives to compensate its employees or to add attractive features to certain security issues. For example, a convertible bond issue would be more attractive to investors than a straightforward bond, due to its convertibility feature.

Nevertheless, shareholders assume the cost of this convertibility and therefore, a Board of Directors that approves large volumes of dilutive securities may be acting against the shareholder’s best interest. Finally, If the company hasn’t issued any dilutive security whatsoever, the Basic EPS will be the same as the Diluted EPS for that time period. 

Diluted EPS vs Basic EPS Cautions

While the Diluted EPS is a reasonable approach to estimate the effect of dilutive securities on the profitability of a business’ shares, the fact that it assumes that all the instruments will be fully exercised at the same time makes it a bit unrealistic. In reality, dilutive securities are exercised at different points in time, unless their strike price becomes very attractive for the holders.

Given the fact that companies usually issue stock options with a strike price that benefits shareholders to some extent, the effect of the dilutive securities may be lower than that shown by the Income Statement.

For example, a business could issue stock options for its executives with a strike price that’s 25% higher than the current price of the stock. If that the case, shareholders will see their EPS reduced but the price of the stock will rise significantly and they will be able to cash in through this capital gain.

Frequently Asked Questions

What distinguishes basic EPS from diluted EPS in financial reporting?

Basic EPS calculates a company’s earnings per share using the number of outstanding shares, excluding potential shares from conversions or options, while diluted EPS accounts for all possible shares that could be created from conversions, options, and warrants, providing a more conservative perspective on earnings.

How does the inclusion of convertible securities affect diluted EPS compared to basic EPS?

Convertible securities, such as convertible bonds or stock options, are included in the calculation of diluted EPS, potentially lowering the earnings per share by increasing the total share count, unlike basic EPS, which only considers current outstanding shares.

Why might an investor prefer to look at diluted EPS over basic EPS?

Investors may prefer diluted EPS as it provides a “worst-case” scenario by showing the lowest possible earnings per share if all convertible securities were exercised, offering a more comprehensive view of a company’s financial health.

Can both basic and diluted EPS be the same under certain conditions?

Yes, basic and diluted EPS can be the same if a company has no convertible securities, options, or warrants that could potentially dilute the number of shares, making both calculations result in the same value.

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The Assets to Sales Ratio Formula is a similar calculation to the more popular Asset Turnover Ratio, as it also calculates how efficient a company is in employing its assets to generate sales. The main difference between these two ratios is that the Asset to Sales indicates how many dollars in assets are required to produce a dollar in sales.

Using the Asset to Sales or the Asset Turnover Ratio should lead analysts to similar conclusions, as the relationship between the variables is the same.

Nevertheless, some analysts prefer the Assets to Sales Ratio since it provides a clearer picture of how efficient an investment in the company is, as it calculates how much in assets are required to be invested to be produce a dollar in sales.

If the ratio is high, this indicates that the company requires much more assets and, therefore, the business may be classified as a capital intensive one.

In turn, if the Assets to Sales Ratio is low, this points to the fact that the business is highly efficient as it requires a lower investment to produce the same amount of sales. This ratio doesn’t really indicate if those sales are profitable, as it evaluates efficient and productivity rather than profitability.

Key Takeaways

Asset to Sales Ratio Formula

The formula to calculate the Assets to Sales Ratio is:

ATS = Total Assets / Net Revenues

Where:

Total Assets: The sum of all the company’s current, fixed, intangible and other assets.

Net Revenues: The total sales produced by the company during a certain time period minus any discounts, markdowns, returns or refunds extended to clients.

The information required to calculate the Assets to Sales Ratio can be found in the company’s financial statements, specifically in the Balance Sheet and the Income Statement.

Some analysts hand-pick the assets that they include in the calculation of the Assets to Sales Ratio, since some assets are not really productive in terms of generating sales. In order to really understand how efficient the business is they can exclude some assets that bring little to nothing in terms of generating additional revenues for the business.

The result of the formula is understood as the amount of assets required to produce a dollar of revenue.

Example

Let’s say an analyst wants to compare the efficiency of three different oil & gas distribution businesses who operate pipelines, refineries and storage facilities throughout the United States. Considering these 3 companies operate in the same industry, the results are relevant to understand their competitiveness and the productivity of their capital investments.

This is the information provided by each company:

(in thousands)

Company A

Net Revenues: $254,930

Total Assets: $674,300

Company B

Net Revenues: $388,198

Total Assets: $564,312 

Company C

Net Revenues: $783,799

Total Assets: $1,038,833

With this information we can calculate the ASR for each company as follows:

ASR_{Company A} = $674,300 / $254,930 = 2.65

ASR_{Company B} = $564,312 / $388,198 = 1.45

ASR_{Company C} = $1,038,833 / $783,799 = 1.33

According to this comparison, Company C seems to be much more efficient than the other two companies, as it only requires a $1.33 dollar in assets to produce $1 in revenues

How to Interpret the Assets to Sales Ratio? Key Analysis

Analyzing the Assets to Ratio Formula can provide very valuable information to investors who are looking for businesses that employ their capital profitably. A business that has a low ASR is one that employs its assets productively to generate more sales.

By using the example above we can explain some of the key insights that can be obtained through the analysis of the ASR. For example, Company C appears to be the most efficient business in the context of the ASR, closely followed by its competitor, Company B. The thing that could make these business more efficient and productive than Company A could be the fact that they use a higher percentage of their distribution and processing capacity, which in turn creates more revenue.

On the other hand, Company A seems to be 50% less productive than the other two and this could mean that their assets may have low utilization ratios, carrying and processing perhaps only a percentage of the volume they could effectively deal with.

This analysis may vary from one business to the other, but in any case the approach is the exact same. An analyst can use the Assets to Sales Ratio to determine if a company is productively using its assets to generate sales by comparing the company to its closest competitors.

Additionally, an analyst could also evaluate the evolution of the ASR over time. If there’s a downward trend in the ASR that could indicate that the company is struggling to produce sales with the assets it has. The solution for this would be to get rid of unproductive assets or find ways to increase the utilization rate, perhaps by exploring new markets.

On the other hand, if the ASR has been increasing over time this indicates that the company is increasing its efficiency and this could have a significant impact in its profitability if new investments are in the horizon. 

Cautions

Some analysts decide to hand-pick the assets they incorporate into their ASR analysis to make sure they evaluate the company based on the assets that are actually productive in terms of sales. Nevertheless, this can be a time-consuming and highly-technical task and it is not recommended for someone who is not an expert in the financial field.

If you do decide to engage in this practice, you must carefully analyze the notes attached to the company’s financial statements to find out which assets you should include and which you should leave out based on more detailed information that the one shown in the summarized Balance Sheet.

Some unproductive assets may include expenses paid upfront such as insurance policies, unproductive fixed assets such as corporate jets, and other of the sort. If you do decide to go this road, this could provide a clearer picture, as some companies may have significant portions of unproductive assets on their Balance Sheets.

Frequently Asked Questions

What does the asset to sales ratio indicate about a company’s operational efficiency?

The assets to sales ratio measures the amount of assets a company uses to generate one dollar of sales; a lower ratio suggests the company is using its assets more efficiently to produce revenue.

How can the asset to sales ratio be used to compare companies within the same industry?

This ratio allows for direct comparison of operational efficiency between companies by showing how effectively each company utilizes its assets to generate sales, making it easier to identify which companies are managing their assets more productively.

Can a change in the asset to sales ratio signal shifts in a company’s financial strategy?

Yes, a significant change in the ratio can indicate a change in the company’s operational or financial strategy, such as increased capital investments or changes in asset management practices, affecting its efficiency in generating sales.

Why might a company with a high assets to sales ratio be a cause for concern?

A high assets to sales ratio may signal that a company is not efficiently using its assets to generate sales, possibly due to underutilized assets or inefficiencies in operations, potentially impacting profitability.

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Accounting liquidity is a business’ capacity to cover its short-term liabilities with its most liquid assets like cash, cash equivalents, inventory, and account receivables. This demonstrations how financially secure a company is by showing its ability to meet its short term obligations without liquidating any long-term assets.

Accounting liquidity is different for the traditional concept of liquidity, which often refers to cash itself, as it involves other assets that can be turned into cash in a short period of time.

Accounting Liquidity Formula

The accounting liquidity formula is calculated through several different liquidity ratios listed below:

Current Ratio

The current ratio compares the current assets to current liabilities in an effort to measure a firm’s ability to pay its short term obligations with only current assets like cash and accounts receivables. Here is the current ratio formula.

Current Ratio = Current Assets / Current Liabilities

Quick Ratio

The quick ratio compares only the most current assets ( cash, cash equivalents, and A/R ) to a company’s current liabilities. These are the assets that a company an quickly convert into cash if needed. This ratio measures how able the company is to pay off its current obligations with only these ultra current assets. Here is the quick ratio formula.

Quick Ratio = (Cash + Cash Equivalents + Account Receivables) / Current Liabilities

Operating Cash Flow Ratio

The operating cash flow ratio compares the operating cash of the company with its current liabilities. This shows whether the company can pay its current obligations with only its operating cash and none of its other current assets. This is the most strict of the liquidity ratios. Here is the operating cash flow formula.

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

Where:

Current Assets: The sum of all the assets of a company that can be turned into cash in a period of less than 12 months.

Current Liabilities: The sum of all the financial commitments of the company that are due in 12 months or less.

Operating Cash Flow: The result of adding back non-cash items to the business’ net income plus the net change in its working capital.

The three metrics evaluate the business’ capacity to cover its current liabilities.

The results of each formula indicate how much of the total current liabilities are covered by the different items included in the ratio.

Accounting Liquidity Examples

Pablo is the owner of Fresh Baked, a company that operates 12 bakeries in New York and founded in 1983 by Pablo’s father. He is currently evaluating his company’s liquidity situation and in order to do so, his financial advisor told him it would be wise to apply different financial metrics that will help him in assessing Fresh Baked accounting liquidity.

The latest financial reports of the company show the following information:

(in thousands)

• Cash: $2,301
• Cash Equivalents: $554
• Inventory: $12,403
• Account Receivables: $5,393
• Other Current Assets: $78
• Current Liabilities: $5,401
• Operating Cash Flow: $12,041

With this information we can calculate the three ratios, as follows:

Current Ratio = ($2,301 + $554 + $12,403 + $5,393 + $78) / $5,401 = 3.8

Quick Ratio = ($2,301 + $554 + $5,393) / $5,401 = 1.6

Operating Cash Flow Ratio = $12,041 / $5,401 = 2.2

This means that Fresh Baked is actually in a very favorable position in terms of its accounting liquidity, as it has plenty of current assets to cover for its short term financial commitments. The company appears to be very solid in this sense.

Accounting Liquidity Advantages

The concept of liquidity can sometimes be confused with solvency. Liquidity refers to the availability of cash to cover for expenses and other payments, while solvency refers to an assessment of a company’s capacity to fulfill its financial obligations.

In this sense, a business may appear to be solvent, but it may not be liquid enough to fulfill its commitments. Accounting liquidity, therefore, refers to a business’ capacity to turn its most liquid assets into cash to pay for all the expenses and other disbursements associated to its operations, on time.

The most common metrics employed to assess a business’ accounting liquidity are the Current Ratio, the Quick Ratio and the Operating Cash Flow Ratio. The first two employ information contained in the company’s Balance Sheet to estimate accounting liquidity, while the latter employs information coming from both the Balance Sheet and the Cash Flow Statement.

Analysis and Business Uses

Each of these accounting liquidity ratios can be interpreted as follows: if the result is equal higher than 1, it means that the company has enough current assets, liquid assets or operating cash flow to fully cover its current liabilities. On the other hand, if the result is lower than 1 it means that the business doesn’t have enough assets or cash flow to cover for these commitments.

Nevertheless, each of the ratios should be analyzed separately, as their results have different interpretations. The Current Ratio for example, should always be higher than 1 to make sure the company is sustainable over time. A Current Ratio lower than one indicates that there are no sufficient current assets to cover for the company’s current liabilities, which means that in a period of 12 months the company may struggle to pay for its dues.

On the other hand, a Current Ratio that is too high compared to industry averages may be indicating that the business is failing to allocate its resources into more profitable ventures, as current assets, due to their liquidity, are usually less profitable than long-term investments.

The Quick Ratio differs from the Current Ratio in the sense that it approaches liquidity in a very extreme way, assuming that the inventory of the business and other assets will not be turned into cash in a short period of time. For this reason, a ratio below 1 can be considered adequate in most cases, but a ratio as low as 0.2 or 0.1 can be signaling that the company’s accounting liquidity is in trouble.

Finally, the Operating Cash Flow Ratio indicates the coverage provided by the company’s cash earnings during a certain time period. It is also very rare to find a coverage higher than 1. In any case, a ratio of 0.5 and above can be considered adequate.

In the example above, we can see that Fresh Baked has a comfortable accounting liquidity situation, considering all of the ratios resulted above 1. This is not necessarily positive, as it may be indicating that the company is not being able to adequately invest its money into more profitable operations such as opening new bakeries. The company should work on an expansion plan that employs these excess funds to increase the profitability of the business.

Cautions

These ratios combined provide a good picture of the overall liquidity situation of a business. Nevertheless, they fail to illustrate managers, investors and creditors about the exact moments when certain debts and commitments are due. The only way a company can keep track of such specific information is through a cash budget, which is a financial management tool that is often inaccessible to third parties or outsiders.

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What Does Random Sample Mean?

These samples are obtained from a lottery-like process where each individual subject from the population shares the same percentage of probability to be picked. It is a sample that doesn’t necessarily describes the population as a whole, since random sampling has as its main disadvantage that it doesn’t take into account the different segments of the population in order to pick the sample subjects. On the other hand, random samples serve as a great starting point for market research projects with a low level of resources since the researcher can draw some initial hypotheses that he can study further individually, in a more profound manner.

In business, random samples are often employed to gather information about work environment perception, customer satisfaction, opinions about a product’s quality or to determine the effect of the business’ advertisement efforts. Also, newly formed businesses employ random sampling as a method to collect primary information about the product or service they are currently developing in order to measure the size and potential profitability of the target segment.

Example

Luke and his brother Samuel have an idea to start a new business to manufacture and sell protein bars in all the gyms located in their city. They branded the bars “Pro-Snack” and they have a patented recipe invented by Luke, who is a certified nutritionist. In order to determine if the business potential is big enough for them to start devoting time to it they randomly picked 20 gyms each from a population of around 350 that are located in the city. Luke took the east side of the city and Samuel went to the west side.

They designed a small survey that they will apply to each of the gym’s managers and these will help them identify the market’s potential and willingness to purchase the product and the gym’s enthusiasm to display them with a potential profit involved for being distributors.

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What Does Gross Income Mean?

This figure is normally found in the income statement of any company’s annual report. It is a very useful metric to understand how much money the company keeps for each dollar being sold. This will be accomplished by dividing the gross income by total revenues. High gross incomes are especially helpful when the economy is not doing well since the company can reduce its prices to stay competitive.

On the other hand, a high gross income means that company products are perceived as more valuable than the cost of producing it; that often means there’s an added intangible value, which is normally the case for technology product. A low gross income commonly means that the market is too crowded with competitors or the industry is decaying due to obsolescence or product substitution.

Let’s take a look at this example

Example

Gary’s Ties LLC is a company that produces custom-made ties. The company currently sells its products online through its own website and they are getting a lot of business. The company sells the ties for $22 and the cost of manufacturing each tie is $7. Last year the company sold 23,250 ties and this year the company’s goal is to sell 34,000 units. In this case, what would be the gross income for both last year and this year?

According to our concept, gross income is defined as total revenues of a business minus cost of goods sold. In this case, last year’s revenues were $511,500 ($22 x 23,250) and cost of goods sold was $162,750 ($7 x 23,250), which left the company a gross income of $348,750. On the other hand, this year forecasted gross income is $510,000 ($22 x 34,000 minus $7 x 34,000).

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What Does Trend Analysis Mean?

Trend analysis is a technique employed by technical analyst in the financial industry to predict the future movements of a given asset. They employ historical data to determine the direction of the trend. The goal of this procedure is to identify attractive investment opportunities that are currently showing an upward trend; and of course, to identify downtrends too, so investors can get out before losing money.

Perhaps one of the disadvantages of trend analysis is that past behavior is not always consistent in the future, in other words, whatever the price of a given security did in the past is not necessary an indication of what it will do in the future because there are a lot of other significant elements that come into play when it comes to determining the value a financial security.

Here’s an example.

Example

Mr. Nolan is a Financial Analyst at Duck Financial LLC. He is currently analyzing the historical stock data of a company called Black Sea Petroleum LLC. The company’s stock price has been increasing on a daily basis for the last 7 days, by 0.02% a day. Mr. Nolan determined that this is an uptrend, since in the past, whenever the company has had this increases the uptrend has endured for more than 3 months.

This is an example of how trend analysis work. By analyzing the historical behavior of the stock the analyst can gather evidence to issue an opinion and to predict future movements of the stock price. By doing this, an investor can make the decision of investing in Black Sea Petroleum LLC stocks because there’s a potential gain in the transaction, according to the analyst opinion.

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