C-Score (Montier)

Montier C Score

The Montier C-Score is an indicator developed by James Montier in a June 2008 research paper called Cooking the books, or, more sailing under the black flag.

He developed it to identify companies that were cooking the books to find companies to short (sell their shares now to profit from buying them back at a lower price in future).

This is how the C-Score is calculated

The C-Score has six inputs:

1. A growing difference between net income and cash flow from operations. In general, managements have less flexibility in changing cash flows than earnings.  Earnings contain  a  large  number  of  highly  subjective  estimates  such  as  bad  debts and pension returns. A growing difference between net income and cash flows may also indicate more aggressive capitalisation of costs.  

2. Increasing days sales outstanding (DSO). This, of course, signifies that accounts receivable are growing faster than sales. This measure is really aimed at picking up channel stuffing (sending inventory to customers).  

3. Growing day’s sales of inventory (DSI). Growing inventory is likely to indicate slowing sales, never a good sign.  

4. Increasing other current assets to sales. Clever companies know that investors often look at DSO and DSI, thus they may use this catch-all line item to help hide things they don’t want investors to focus on.  

5. Declines in depreciation relative to gross property plant and equipment. To beat the quarterly earnings target, firms can easily alter the estimate of useful asset life.  

6. High total asset growth.  Some  firms  become  serial  acquirers  and  use acquisitions  to  distort  their  earnings.  High asset growth companies receive a flag in the score.  

If any of the above statements is true the input gets a score of one, and if not a score of zero. For example if a company has increasing DSI it receives a score of one.

High is bad (6 = Bad and 0 = Good)
These are then summed across the six inputs to give you a final C-Score from 0 (no evidence of book cooking) to 6 (high likelihood book cooking).


C-Score missing = -1
A C-Score of -1 means that there is not enough information available to calculate the C-Score with.


More information and back test of the Montier C-Score

For back-test results of the C-Score click the following link: James Montier C-Score back-test

You can find more information here: Simple ratios help you identify companies that cook their books – The C-Score 


How to use the C-Score

Available as a screening ratio: Yes

Available as an output column ratio: Yes (Look for it under the Quality heading)


How to select the worse C-Score companies

To find companies with the worse C-Score (high likelihood book cooking) set the slider from 80% to 100%.


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