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: Ernst & Young LLP (PCAOB ID 42) — Unqualified opinion (1 critical audit matter)
One-line verdict: Sherwin-Williams is an operationally exceptional business trapped in a leveraged balance sheet. Goodwill plus intangibles of $12.0 billion equals 261% of shareholders' equity — the highest ratio among all companies screened in this universe. Cash of just $207 million covers 2% of $12.9 billion in total debt. The company generated $3.5 billion in operating cash flow, earned $2.6 billion in net income, and produced $2.7 billion in free cash flow — all on 48.8% gross margins from its 4,853 Paint Stores. But the legacy Valspar acquisition goodwill, the October 2025 Suvinil acquisition in Brazil, and perpetually negative or negligible equity make the balance sheet permanently fragile. The M-Score of -2.49 is clean but narrow, with DSRI at 1.145 reflecting AR growth outpacing revenue.
| Metric | Result |
|---|---|
| :x: Red Flags | **2** (Goodwill 261% of equity, Cash-to-Debt 2%) |
| :warning: Watch Items | **1** (AR +16.8% vs revenue +2.1%) |
| Checks Completed | **17/18** (1 N/A: impairment data) |
| Beneish M-Score | **-2.49** (clean, narrow) |
| Altman Z-Score | **1.11** (grey zone — structural, not distress) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
The Paint Store Monopoly
Sherwin-Williams operates through three reportable segments: Paint Stores Group (4,853 company-operated stores in the U.S., Canada, and Caribbean), Consumer Brands Group, and Performance Coatings Group.
Per the filing: "Paint Stores Group consisted of 4,853 company-operated specialty paint stores in the United States, Canada and the Caribbean region at December 31, 2025. Each store is engaged in servicing the needs of architectural and industrial paint contractors and do-it-yourself homeowners."
In October 2025, SHW "completed our acquisition of Suvinil, a leading provider of architectural paints in Brazil, with annual sales of approximately $525 million." The auditor noted that Suvinil's "Total assets and Net sales represented approximately 5.0% and less than 1.0% of the Company's respective consolidated Total assets and Net sales" — reflecting only a partial year of consolidation.
Foreign subsidiaries accounted for "approximately 19.6% of total consolidated Net sales in 2025."
Profitability: Consistent and Expanding
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $22.1B | $23.1B | $23.1B | $23.6B | +2.1% |
| Net Income | $2.0B | $2.4B | $2.7B | $2.6B | Stable high |
| Gross Margin | 42.1% | 46.7% | 48.5% | 48.8% | Expanding |
| Net Margin | 9.1% | 10.4% | 11.6% | 10.9% | Strong |
| ROE | 65.1% | 64.3% | 66.2% | 55.9% | Very high (low equity) |
Gross margin has expanded from 42.1% to 48.8% over four years — a 6.7 percentage point improvement on flat-to-modest revenue growth. This is pricing power at work: SHW has consistently raised paint prices above input cost inflation. The consumer doesn't comparison-shop paint like they do commodities.
ROE appears astronomical (55.9%-66.2%) but is structurally inflated by negligible equity — SHW's shareholders' equity was only $4.6B against $23.6B in revenue.
Cash Flow: Clean and Predictable
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $3.5B | $3.2B | $3.5B |
| Net Income | $2.4B | $2.7B | $2.6B |
| CFFO / NI | 1.47 | 1.18 | 1.34 |
| CapEx | $889M | $1.1B | $798M |
| Free Cash Flow | $2.6B | $2.1B | $2.7B |
CFFO/NI of 1.34 confirms profits are backed by cash. Free cash flow of $2.7B (FCF/NI = 1.03) means the company generates more free cash than it reports in net income — the highest-quality pattern possible.
Per the filing, the interest expense increase of $49.3M in FY2025 was "primarily due to an increase in long-term debt, interest expense related to the new global headquarters and research and development center which were both placed into service in 2025 and an increase in short-term borrowings primarily to fund the October 2025 acquisition of Suvinil."
CapEx declined from $1.1B to $798M as the new headquarters and R&D center were completed. "This segment incurred most of the Company's capital expenditures related to ongoing environmental compliance measures, manufacturing capacity expansion, operational efficiencies and maintenance projects."
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | :white_check_mark: | DSO 43 days, +5 days YoY |
| A2 | AR vs Revenue Growth | :warning: | AR +16.8% vs revenue +2.1% |
| A3 | Revenue vs CFFO | :white_check_mark: | Revenue +2.1%, CFFO +9.5% |
A2 watch. AR grew 16.8% on only 2.1% revenue growth, with DSO increasing 5 days. The Suvinil acquisition (October 2025) likely contributed — adding a full quarter of Brazilian receivables against less than a quarter of revenue. This is acquisition-driven noise, not organic deterioration, but warrants monitoring in FY2026 when Suvinil has a full year.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | :white_check_mark: | Inventory +1.3% vs COGS +1.3% |
| B2 | CapEx vs Revenue | :white_check_mark: | CapEx -25.5% vs revenue +2.1% |
| B3 | SG&A Ratio | :white_check_mark: | SG&A/Gross Profit = 66.9% |
| B4 | Gross Margin | :white_check_mark: | 48.8%, +0.4pp, stable |
Perfectly clean expense quality. Inventory and COGS move in lockstep. CapEx declined as the new headquarters project completed. SG&A at 66.9% of gross profit is high but normal for a company operating thousands of retail stores.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | :white_check_mark: | CFFO/NI = 1.34 |
| C2 | Free Cash Flow | :white_check_mark: | FCF $2.7B, FCF/NI = 1.03 |
| C3 | Accruals Ratio | :white_check_mark: | -3.4%, low accruals |
| C4 | Cash vs Debt | :x: | Cash $207M covers only 2% of debt $12.9B |
C4 critical failure. Cash of $207M against $12.9B in debt is the thinnest cash-to-debt ratio in this screening batch. Total debt rose from $11.9B (FY2024) to $12.9B — the Suvinil acquisition drove the increase. However, SHW generates $3.5B annual operating cash flow, which comfortably services the debt. The company deliberately operates with minimal cash, relying on its revolving credit facility for short-term liquidity.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | :x: | $12.0B = 261% of equity |
| D2 | Leverage | :white_check_mark: | Debt/EBITDA = 2.9x, manageable |
| D3 | Soft Asset Growth | :white_check_mark: | Other assets +7.8% vs revenue +2.1% |
| D4 | Asset Impairment | — | No write-off data available |
D1 is a critical failure — and the most important line item in this report. Goodwill of $8.0B and intangibles of $4.0B sum to $12.0B, against shareholders' equity of only $4.6B. This 261% ratio means that if SHW had to write down even 38% of its intangibles, shareholders' equity would go to zero.
The bulk of this goodwill originated from the 2017 Valspar Corporation acquisition. The Z-Score of 1.11 sits in the grey zone — but this is structural (driven by the goodwill/equity ratio), not indicative of near-term distress. The company's cash flow generation is more than sufficient to service obligations.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | :white_check_mark: | FCF after acquisitions positive |
| E2 | Goodwill Surge | :white_check_mark: | Goodwill+Intangibles +8% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | :white_check_mark: | -2.49 (clean, narrow) |
DSRI at 1.145 is the most elevated component, reflecting AR growth. The soft_assets component of the F-Score at 0.7552 is notably high — unsurprising given 75% of assets are goodwill, intangibles, and other soft items.
Key Risks from the 10-K
1. Lead Pigment Litigation
The filing references "lead pigment and lead-based paint litigation" as a forward-looking risk. Sherwin-Williams, as the world's largest paint company, carries legacy exposure from decades of lead paint sales. The filing warns that forward-looking statements are "subject to risks, uncertainties and other factors" including this litigation.
2. Suvinil Integration and Brazil Risk
The filing warns: "The success of the Suvinil acquisition, and other past and future acquisitions depends in large part on our ability to integrate the operations and personnel of the acquired companies and manage challenges that may arise." Operating in Brazil introduces currency risk, regulatory complexity, and macroeconomic volatility.
3. Debt Level and Interest Cost
The filing notes that the debt level could "limit cash flow available to return to shareholders in the form of dividends and share repurchases; increase our vulnerability to adverse business, economic or industry conditions; limit our ability to obtain additional financing" and "place us at a competitive disadvantage compared to businesses in our industry that have less debt."
4. Permanent Negative Working Capital
SHW's working capital is negative ($-0.035 of total assets), meaning current liabilities exceed current assets. This is by design in a retail business with daily cash collections and payment terms with suppliers — but it means any disruption to revenue (recession, pandemic) immediately creates liquidity pressure.
Summary
Grade: F. The best operating business with the most leveraged balance sheet in this batch.
Sherwin-Williams' operations are pristine: 48.8% gross margin, FCF exceeding net income, accruals near zero, and a dominant market position with 4,853 captive retail stores. The F grade is entirely structural — goodwill at 261% of equity and cash at 2% of debt are the highest-risk readings in the entire screening universe.
This is not a company that will go bankrupt. It generates $3.5B of annual operating cash against $12.9B in debt, with Debt/EBITDA at a manageable 2.9x. But the balance sheet has no margin for error. If construction activity declines sharply, if paint demand drops, or if a significant goodwill impairment is triggered, the equity cushion would erode rapidly. The Z-Score of 1.11 quantifies this fragility.
**Disclaimer**: This report is based on Sherwin-Williams' FY2025 10-K filed with SEC EDGAR on February 19, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion, 1 critical audit matter)
Fiscal year ended: December 31, 2025