Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-19, FY ended December 31, 2025) + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP (PCAOB ID 238) — Unqualified opinion (1 critical audit matter: Goodwill impairment — Architectural Coatings EMEA)
One-line verdict: PPG's two red flags are structural, not cyclical. Goodwill plus intangibles of $8.1 billion equals 102% of shareholders' equity — meaning the company's entire equity cushion would be wiped out by an intangibles write-down. Cash of $2.2 billion covers only 28% of $7.9 billion in total debt. Revenue was essentially flat at $15.9 billion, and the auditor flagged goodwill impairment testing for the Architectural Coatings EMEA reporting unit as the sole critical audit matter. The M-Score of -2.46 passes but narrowly, with the DSRI at 1.121 reflecting AR growing faster than flat revenues. PPG is a well-run coatings business carrying the balance sheet scars of a decade of acquisitions.
| Metric | Result |
|---|---|
| :x: Red Flags | **2** (Goodwill 102% of equity, Cash-to-Debt) |
| :warning: Watch Items | **1** (AR growth exceeding revenue) |
| Checks Completed | **18/18** |
| Beneish M-Score | **-2.46** (clean, narrow margin) |
| Altman Z-Score | **5.58** (safe zone) |
| Auditor | PwC — Unqualified opinion |
Three Segments, One Problem
PPG operates through three reportable segments: Global Architectural Coatings (trade and DIY paint), Performance Coatings (industrial, automotive refinish), and Industrial Coatings (OEM factory-applied coatings). Per the filing, the company "seeks to optimize its investment in research and development to create new products to drive profitable growth," spending $446M on R&D (2.8% of sales) — consistent across three years.
Revenue seasonality is meaningful: "Income before income taxes has typically been greater in the second and third quarters and Cash from operating activities has been greatest in the fourth quarter due to end-use market seasonality, primarily in our architectural coatings business."
Profitability: Flat Revenue, Expanding Margins
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $15.6B | $16.2B | $15.8B | $15.9B | Flat |
| Net Income | $1.0B | $1.3B | $1.1B | $1.6B | +41% |
| Gross Margin | 36.1% | 40.4% | 41.6% | 41.3% | Stable high |
| Net Margin | 6.6% | 7.8% | 7.0% | 9.9% | Expanding |
| ROE | 15.6% | 16.2% | 16.4% | 19.8% | Healthy |
Net income jumped 41% to $1.6B on essentially flat revenue, suggesting cost efficiencies and pricing discipline. Gross margin of 41.3% is excellent for a specialty chemicals company and has expanded steadily from 36.1% in FY2022. The company has been successfully passing through raw material cost increases while maintaining pricing.
Cash Flow: Solid Conversion
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $2.4B | $1.4B | $1.9B |
| Net Income | $1.3B | $1.1B | $1.6B |
| CFFO / NI | 1.90 | 1.27 | 1.23 |
| CapEx | $516M | $721M | $778M |
| Free Cash Flow | $1.9B | $699M | $1.2B |
CFFO/NI of 1.23 shows profits are backed by cash. Free cash flow of $1.2B represents 74% of net income — healthy. Capital expenditures for environmental control projects were $19M in FY2025, expected to be similar in FY2026.
Share repurchases: "6.9 million shares repurchased for $790 million" in FY2025. The Board authorized a "$2.5 billion share repurchase plan in April 2024" with "approximately $2.0 billion remaining."
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | :white_check_mark: | DSO 64 days, +7 days YoY |
| A2 | AR vs Revenue Growth | :warning: | AR +12.4% vs revenue +0.2% |
| A3 | Revenue vs CFFO | :white_check_mark: | Revenue +0.2%, CFFO +36.7% |
A2 watch. Accounts receivable grew 12.4% while revenue was flat. DSO increased 7 days to 64 days. For a coatings company with end-of-year seasonality weighted toward architectural sales in warmer months, this pattern bears watching. It could reflect Q4 timing of shipments or loosening credit terms.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | :white_check_mark: | Inventory +8.1% vs COGS +0.7% |
| B2 | CapEx vs Revenue | :white_check_mark: | CapEx +7.9% vs revenue +0.2% |
| B3 | SG&A Ratio | :white_check_mark: | SG&A/Gross Profit = 52.4% |
| B4 | Gross Margin | :white_check_mark: | 41.3%, -0.3pp, stable |
All clean. Inventory rose modestly relative to flat COGS, consistent with anticipatory stocking rather than demand weakness.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | :white_check_mark: | CFFO/NI = 1.23, profits backed by cash |
| C2 | Free Cash Flow | :white_check_mark: | FCF $1.2B, FCF/NI = 0.74 |
| C3 | Accruals Ratio | :white_check_mark: | -1.7%, low accruals |
| C4 | Cash vs Debt | :x: | Cash $2.2B covers only 28% of debt $7.9B |
C4 failure. Total debt rose from $6.4B (FY2024) to $7.9B, primarily from "increased proceeds from long-term debt." Cash of $2.2B provides limited coverage. However, the debt increase was deliberate — PPG took on debt to fund acquisitions and share repurchases while maintaining Debt/EBITDA at 2.8x.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | :x: | $8.1B = 102% of equity |
| D2 | Leverage | :white_check_mark: | Debt/EBITDA = 2.8x, healthy |
| D3 | Soft Asset Growth | :white_check_mark: | Other assets +4.9% vs revenue +0.2% |
| D4 | Asset Impairment | :white_check_mark: | Write-offs normal |
D1 is a critical failure. Goodwill of $6.1B and intangibles of $2.0B total $8.1B — exceeding shareholders' equity. This is the legacy of PPG's acquisition strategy, accumulated over years of bolt-on coatings company purchases. The auditor identified goodwill impairment testing specifically for the "Architectural Coatings Europe, Middle East and Africa (EMEA) reporting unit" as the critical audit matter, stating it "involved our especially challenging, subjective, or complex judgments."
If the EMEA architectural coatings business underperforms, a goodwill write-down could materially erode equity.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | :white_check_mark: | FCF after acquisitions positive |
| E2 | Goodwill Surge | :white_check_mark: | Goodwill+Intangibles +7% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | :white_check_mark: | -2.46 (clean, narrow) |
M-Score of -2.46 passes but with only 0.24 points of cushion. The DSRI at 1.121 (receivables growing faster than sales) is the primary driver — consistent with the A2 watch flag. No other components are alarming.
Key Risks from the 10-K
1. EMEA Goodwill — The Auditor's Concern
The sole critical audit matter is the Architectural Coatings EMEA goodwill. European construction markets have been weak, and if PPG's EMEA architectural coatings business doesn't recover, a goodwill impairment charge could be material. With goodwill already exceeding equity, any write-down directly erodes the balance sheet.
2. Environmental Remediation Legacy
PPG's legacy as a glass and chemicals manufacturer left environmental liabilities. The filing references the "Jersey City Manufacturing Plant" remediation and "Legacy Glass and Chemical Sites" as ongoing environmental contingencies. Capital expenditures for environmental remediation were $19M in FY2025 — modest but recurring.
3. Flat Revenue Growth
Revenue has been essentially flat for four years ($15.6B-$16.2B range). PPG is growing earnings through margin expansion and buybacks, not organic revenue growth. This is sustainable only as long as pricing power holds and input costs remain favorable.
4. Foreign Currency Exposure
Per the filing, PPG's income "has typically been greater in the second and third quarters" and the company has significant EMEA and Asia-Pacific operations. Foreign currency translation affects both revenue and balance sheet valuations.
Summary
Grade: F. Goodwill exceeding equity and thin cash coverage trigger two failures.
PPG's operations are solid: stable 41% gross margins, CFFO/NI of 1.23, FCF of $1.2B, and manageable leverage at 2.8x Debt/EBITDA. The F grade is structural — the accumulated goodwill from years of acquisitions now exceeds shareholders' equity, and the auditor has specifically called out EMEA goodwill impairment testing as a critical audit matter. The cash-to-debt ratio of 28% is tight but not distressed, given strong cash generation.
The M-Score passes narrowly at -2.46, driven by receivables growth on flat revenue. This is a company that has built an excellent operating business but loaded its balance sheet with acquisition-related intangibles that create permanent impairment risk.
**Disclaimer**: This report is based on PPG's FY2025 10-K filed with SEC EDGAR on February 19, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: PricewaterhouseCoopers LLP (Unqualified opinion, 1 critical audit matter — EMEA goodwill impairment)
Fiscal year ended: December 31, 2025