Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2025-11-19) + Yahoo Finance
Auditor: Ernst & Young LLP — Clean opinion (unqualified)
One-line verdict: D.R. Horton is the largest homebuilder in the United States, operating in 126 markets across 36 states with $34.3B in revenue. Two red flags emerged: CFFO has trailed net income for three consecutive years (ratios of 0.95, 0.46, and 0.91), reflecting the capital-intensive homebuilding model where land and lot purchases consume operating cash; and cash of $3.0B covers only 50% of $6.0B in debt. Yet the business is fundamentally sound — FCF of $3.3B is robust, the Altman Z-Score of 12.01 is extraordinary (the strongest among peers), and Debt/EBITDA is just 1.3x. The M-Score could not be computed due to missing receivable data, but the F-Score probability of 0.66% is slightly elevated. The homebuilding industry naturally produces CFFO/NI ratios below 1.0 due to heavy inventory investment — this is not necessarily earnings manipulation.
| Metric | Result |
|---|---|
| Red Flags | **2** |
| Watch Items | **0** |
| Checks Completed | **14/18** (4 N/A) |
| Beneish M-Score | **N/A** (insufficient data) |
| F-Score (Fraud Probability) | **1.79** (0.66% probability) |
| Altman Z-Score | **12.01** (safe zone — very strong) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
| Fiscal Year | 2025 (ended September 30, 2025) |
| Report Date | 2026-04-05 |
The Business: America's Largest Homebuilder
The 10-K states: "D.R. Horton, Inc. is the largest homebuilding company in the United States as measured by number of homes closed. We construct and sell homes through our operating divisions in 126 markets across 36 states." The stock is listed on both the NYSE and NYSE Texas (listing became effective June 2025).
The filing's selected financial data shows revenues of $31,271.6M from homebuilding operations, cost of sales of $24,646.7M, and SG&A expense of $2,565.9M, producing income before taxes of $4,130.0M and net income of $3,154.8M.
Note: Yahoo Finance reports total revenue of $34,250.4M which includes financial services and other segments.
Profitability: Normalizing After Boom
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $33,480M | $35,460M | $36,801M | $34,250M | -6.9% YoY |
| Gross Profit | $10,504M | $9,350M | $9,535M | $8,116M | -14.9% |
| Gross Margin | 31.4% | 26.4% | 25.9% | **23.7%** | Declining |
| Net Income | $5,858M | $4,746M | $4,756M | $3,585M | -24.6% |
| Net Margin | 17.5% | 13.4% | 12.9% | **10.5%** | Declining |
| ROE | 30.2% | 20.9% | 18.8% | **14.8%** | Declining |
Profitability is normalizing from the 2022 housing boom peak. Gross margin declined from 31.4% to 23.7% over four years as home prices moderated and cost pressures increased. Revenue declined 6.9% in FY2025. The filing notes the company closes "more homes in our homebuilding business during the spring and summer months" with seasonal patterns.
Cash Flow: The Homebuilder Challenge
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Operating Cash Flow | $562M | $4,304M | $2,190M | $3,421M |
| Net Income | $5,858M | $4,746M | $4,756M | $3,585M |
| **CFFO / Net Income** | **0.10** | **0.91** | **0.46** | **0.95** |
| CapEx | -$148M | -$149M | -$165M | -$138M |
| Free Cash Flow | $414M | $4,156M | $2,025M | $3,284M |
CFFO has been below net income for three consecutive years (0.95, 0.46, 0.91), triggering the C1 fail. However, this is a structural feature of homebuilding: the industry requires massive ongoing investment in land, lots, and homes under construction that consume operating cash flow. D.R. Horton's inventory (primarily land and homes) represents the majority of total assets.
The FY2022 ratio of 0.10x was extreme — $562M CFFO against $5.9B net income — reflecting a period of massive land purchases during the housing boom. The ratio has since improved. Free cash flow of $3.3B is strong, suggesting the low CFFO/NI ratios are driven by timing of land investment rather than earnings quality issues.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | N/A | Insufficient data (homebuilders have minimal AR) |
| A2 | AR vs Revenue Growth | N/A | Insufficient data |
| A3 | Revenue vs CFFO | PASS | Revenue -6.9%, CFFO +56.2%. Cash exceeds |
| B1 | Inventory vs COGS | PASS | Inventory +1.5% vs COGS -4.2%. Normal |
| B2 | CapEx vs Revenue | PASS | CapEx -16.9% vs revenue -6.9%. Normal |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 45.5%. Normal |
| B4 | Gross Margin | PASS | Gross margin 23.7%, -2.2pp. Declining but stable |
| C1 | CFFO vs Net Income | **FAIL** | CFFO < NI for 3 consecutive years |
| C2 | Free Cash Flow | PASS | FCF $3.3B, FCF/NI = 0.92 |
| C3 | Accruals Ratio | PASS | Accruals ratio = 0.5%. Low |
| C4 | Cash vs Debt | **FAIL** | Cash $3.0B covers only 50% of debt $6.0B |
| D1 | Goodwill + Intangibles | PASS | Goodwill $164M = 1% of equity. Negligible |
| D2 | Leverage | PASS | Debt/EBITDA = 1.3x. Very healthy |
| D3 | Soft Asset Growth | PASS | Other assets +4.2% vs revenue -6.9%. Normal |
| D4 | Asset Impairment | N/A | No write-off data |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill+Intangibles +13% YoY. Normal |
| F1 | Beneish M-Score | N/A | Insufficient data |
C1 Context: Homebuilder Cash Flow Dynamics
The CFFO < NI pattern is endemic to homebuilders. Unlike asset-light businesses where depreciation inflates CFFO above NI, homebuilders constantly invest in land and construction inventory that flows through operating cash flow. D.R. Horton's inventory of homes and lots represents the bulk of its assets. The FCF of $3.3B (0.92x NI) demonstrates that after netting all capital needs, cash generation is solid.
Key Risks from the 10-K
1. Interest Rate Sensitivity
The filing describes extensive risks from the company's mortgage subsidiary: "Our mortgage company must comply with extensive state and federal laws and regulations, which are administered by numerous agencies, including the Consumer Financial Protection Bureau, Federal Housing Finance Agency, U.S. Department of Housing and Urban Development, FHA, VA, USDA, Fannie Mae, Freddie Mac and Ginnie Mae." Higher rates directly reduce home affordability and demand.
2. Housing Market Cyclicality
Revenue declined 6.9% in FY2025 as the housing market normalized. Gross margin compression from 31.4% to 23.7% over four years shows the profit sensitivity to market conditions.
3. Land and Lot Acquisition Risk
Homebuilders must continuously acquire land and lots at prices that allow profitable home sales. Timing mismatches between land purchases and home closings create working capital volatility.
4. Regulatory Compliance
The filing highlights compliance with "extensive state and federal laws and regulations" governing mortgage lending, construction, and environmental requirements.
5. Seasonal Revenue Patterns
The 10-K states the company "generally close[s] more homes in our homebuilding business during the spring and summer months," creating seasonal cash flow volatility that complicates quarterly comparisons.
Key Financial Trends (4-Year)
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Revenue | $33,480M | $35,460M | $36,801M | $34,250M |
| Net Income | $5,858M | $4,746M | $4,756M | $3,585M |
| Gross Margin | 31.4% | 26.4% | 25.9% | 23.7% |
| Net Margin | 17.5% | 13.4% | 12.9% | 10.5% |
| ROE | 30.2% | 20.9% | 18.8% | 14.8% |
| CFFO | $562M | $4,304M | $2,190M | $3,421M |
| CFFO/NI | 0.10 | 0.91 | 0.46 | 0.95 |
| FCF | $414M | $4,156M | $2,025M | $3,284M |
| Cash | $2,541M | $3,874M | $4,516M | $2,985M |
| Total Debt | $6,115M | $5,143M | $5,971M | $6,031M |
Summary
Grade: F. Two red flags — both reflecting homebuilder industry dynamics.
D.R. Horton is the largest homebuilder in the U.S. with a strong franchise across 126 markets. The two red flags — CFFO trailing net income for three consecutive years and cash covering 50% of debt — are both characteristic of the homebuilding industry rather than indicators of accounting manipulation.
The Altman Z-Score of 12.01 is the strongest among all companies screened, reflecting the asset-heavy, equity-funded nature of the balance sheet. Debt/EBITDA at 1.3x is very conservative. Goodwill is negligible at $164M (1% of equity). Free cash flow of $3.3B strongly backs net income at 0.92x.
The real risk is cyclical: housing market normalization has compressed margins from 31.4% to 23.7% and reduced net income from $5.9B to $3.6B over four years. Interest rate sensitivity, regulatory complexity, and land acquisition timing create structural volatility. But from a pure financial integrity perspective, D.R. Horton's books are clean.
**Disclaimer**: This report is based on D.R. Horton's fiscal year 2025 10-K filed with the SEC on November 19, 2025. 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, the flags reflect homebuilder industry cash flow dynamics.