Chipotle Mexican Grill (CMG) 2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-04) + Yahoo Finance

Auditor: Ernst & Young LLP — Clean opinion (unqualified)

One-line verdict: Chipotle is a $11.9B fast-casual restaurant powerhouse with clean fundamentals: $1.5B net income, $2.1B CFFO (1.38x net income), and an M-Score of -2.92 well below any manipulation threshold. The two red flags are structural — AR outpaced revenue for two consecutive years (a technical issue given Chipotle's 5-day DSO and cash-register model), and cash of $1.0B covers only 21% of $5.1B in debt (largely operating lease obligations under ASC 842). With no goodwill, SG&A/Gross Profit at an excellent 21.5%, and expanding margins, Chipotle's earnings quality is among the cleanest in the restaurant industry. The F grade overstates the actual risk.

The Business: Fast-Casual Leader

The 10-K describes: "Chipotle Mexican Grill, Inc., together with its subsidiaries, owns and operates Chipotle Mexican Grill restaurants, which feature a relevant menu of burritos, burrito bowls (a burrito without the tortilla), quesadillas, tacos, and salads. We strive to cultivate a better world by serving responsibly sourced, classically cooked, real food with wholesome ingredients and without artificial colors, flavors or preservatives."

The filing notes Chipotle operates in "the fast-casual, quick-service, and casual dining segments of the restaurant industry" and competes on "taste, price, food quality and presentation, customer service, location, convenience, brand reputation, and cleanliness and ambience."

Profitability: Strong and Growing

Revenue grew 5.4% to $11.9B, but gross margin compressed 1.3 percentage points. The 10-K's competition section notes "competition from food delivery services, which offer meals from a wide variety of restaurants, also has increased in recent years and is expected to continue to increase." Despite margin pressure, net income held essentially flat at $1.54B.

Cash Flow: Consistent and Clean

Cash flow quality is outstanding. CFFO/NI has been consistently between 1.37 and 1.47 for four straight years — a hallmark of stable, cash-generative operations. From the cash flow statement: depreciation and amortization of $361M and deferred income tax provision of $79M drive the gap. The accruals ratio of -6.4% is negative and healthy.

The 18-Point Screening

Red Flag Context: Both Are False Positives

A2 (AR outpacing revenue): Chipotle's DSO is 5 days — nearly all revenue is collected at the point of sale. The absolute AR base is tiny relative to $11.9B in revenue. Small dollar fluctuations in gift card receivables, credit card settlement timing, or delivery platform receivables can trigger this check mechanically. The DSRI component of the M-Score is just 1.031 — essentially flat.

C4 (Cash vs Debt): Cash of $1.0B against $5.1B in "debt" is misleading because Chipotle's debt is predominantly operating lease obligations capitalized under ASC 842 (lease accounting). Chipotle has minimal traditional borrowing. Debt/EBITDA is only 2.1x, confirming the leverage is manageable.

Beneish M-Score Component Breakdown:

Key Risks from the 10-K

1. Food Safety Incidents

The filing warns that food safety is a critical risk. Chipotle has historically faced E. coli, norovirus, and other food safety incidents that damaged its brand. The 10-K states these risks "could materially and adversely affect our business, financial condition and results of operations."

2. Gross Margin Pressure

Gross margin compressed 1.3pp to 25.4%. The filing notes cost pressures from food ingredients, labor, and competition: "Our competition includes a variety of restaurants... including locally-owned restaurants, as well as national and regional chains."

3. Labor Availability and Costs

As a company with thousands of restaurant locations, Chipotle depends on recruiting, training, and retaining hourly employees. The filing cites rising labor costs as a persistent risk.

4. Food Delivery Platform Dependence

"Competition from food delivery services, which offer meals from a wide variety of restaurants, also has increased in recent years." These platforms take a commission, compressing margins on delivery orders.

5. New Restaurant Expansion Risk

CapEx increased 12.3% to support new restaurant openings. Each new unit requires significant upfront investment with uncertain returns depending on location and market conditions.

Key Financial Trends (4-Year)

Summary

Grade: F. Two red flags — both are false positives driven by Chipotle's business model.

Chipotle's earnings quality is exceptional. The CFFO/NI ratio has been stable between 1.37 and 1.47 for four straight years. Free cash flow of $1.4B backs net income at 0.94x. The accruals ratio of -6.4% is negative. The M-Score of -2.92 is well below any manipulation threshold. The F-Score fraud probability is just 0.05% — the lowest among the companies screened. There is virtually no goodwill ($22M), and SG&A/Gross Profit at 21.5% is excellent.

The two red flags are technical: AR outpacing revenue (with 5-day DSO in a cash-register business) and cash vs debt (where "debt" is primarily operating leases, not borrowing). Debt/EBITDA of 2.1x confirms leverage is modest.

The real concern is the 1.3pp gross margin compression, driven by food costs, labor inflation, and delivery platform competition. But with a clean M-Score, consistent cash conversion, and no intangible asset risk, Chipotle's F grade significantly overstates the actual earnings quality risk.

**Disclaimer**: This report is based on Chipotle's fiscal year 2025 10-K filed with the SEC on February 4, 2026. This is NOT investment advice.

**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade F means major red flags were detected — in this case, both flags are technical false positives.