Accounting Ratios

Montier's C-Score

Montier's C-Score is a discrete score between 0-6 which reflects six criteria used to determine whether a company is cooking the books (hence the term “C-Score”). It was devised by James Montier who was then the co-Head of Global Strategy at Société Générale. The points are added to give an overall score. If a company scores 0 there is no evidence of earnings manipulation whilst 6 suggests there is lots of evidence. The areas tested are:

  1. Growing divergence between net income and cash flow (1 point). A higher level of accruals is associated with a higher likelihood of profit manipulation.
  2. Increasing receivable days (1 point). A large increase in receivable days might suggest accelerated revenue recognition to inflate profits.
  3. Increasing inventory days (1 point). Increasing inventory days could suggest that input costs are being artificially flattered or that sales growth is slowing.
  4. Increasing other current assets (1 point). Companies might be aware that investors often look at receivables and inventory, and might disguise problems in current assets.
  5. Declines in depreciation relative to gross fixed assets (1 point). Firms have been known to lower depreciation charges in order to inflate profits.
  6. Total asset growth in excess of 10% (1 point). Some companies become serial acquirers and use acquisitions to distort profits.

We downloaded over 3,000 Asian companies with a market capitalisation exceeding US$1bn and applied the C-Score to their financials between 2011 and 2015. As Figure 7 shows, 14% of companies posted an excellent score of 1 or 0, whilst 11% of companies posted a poor score of 5 or 6. Worst scoring companies are likely to be found in Japan or China, whilst the best scoring companies are to be found in Taiwan and India (really…although it is a very small sample).


Montier found that for the period from 1993 to 2007 (portfolios are formed in June and held for one year), US stocks with high C-scores (5 or 6) underperform the market by around 8% p.a., generating a return of a mere 1.8% p.a.. In Europe, high C-score stocks underperform the market by around 5% p.a., although they still generate absolute returns of around 8% p.a.. When combined with a valuation metric, such as such price to sales in excess of 2x, the returns dropped dramatically resulting in a negative absolute return of 4% p.a. in both the US and Europe. However, while companies with a high C-Score underperformed, there was no evidence that they were actually cooking the books. As such, it might be a better guide to quality