Question

To determine how risky a particular company is that you are auditing, you prepare these five ratios along with the same ratios of this company's peers:

	Company	Peers
Days's Sales in Receivable Index	1.51	1.05
Gross Margin Index	1.98	1.11
Asset Quality Index	1.21	1.01
Sales Growth Index	1.53	1.19
Total Accruals to Total Assets	0.11	0.06

What are your thoughts about the risk potential of this company?

Answer 1

DSRI= Day's Sales in Receivable Index

GMI = Gross Margin Index

AQI= Asset Quality Index

SGI = Sales Growth Index

DEPI = Depreciation Index

SGAI = Sales General and Administrative Index

TATA = Total Accruals to Total Assets

LVGI = Leverage Index

Applying the formula

M Score of Company = -1.81 (approx.)

M Score of Peer = -0.30 (approx.)

The peer company has a higher M score hence the risk potential is supposed to higher in case of Peer company than in the Company