Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2025-08-22, FY ended June 28, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion (1 critical audit matter)
One-line verdict: Sysco is the largest U.S. food distribution company, generating $81.4 billion in revenue and $2.5 billion in operating cash flow — a capital-light, high-volume business that consistently converts earnings to cash (CFFO/NI of 1.37). The F grade is driven by structural balance sheet features common to mature distributors: $14.5 billion debt against $1.1 billion cash, goodwill+intangibles at 345% of a thin equity base, and AR growth outpacing revenue for two consecutive years. A noncash goodwill impairment charge in the Guest Worldwide business reduced operating income. These are real flags under the screening framework, but they reflect the business model of a leveraged distributor rather than financial distress — Debt/EBITDA is a manageable 3.5x and the Z-Score of 2.94 is in the safe zone.
| Metric | Result |
|---|---|
| ❌ Red Flags | **3** (AR outpacing revenue 2 years; Cash 7% of debt; Goodwill+Intangibles 345% of equity) |
| ⚠️ Watch Items | **0** |
| Checks Completed | **15/18** (3 N/A: SG&A, impairment, M-Score data) |
| Beneish M-Score | **N/A** (insufficient data) |
| Altman Z-Score | **2.94** (safe zone) |
| Auditor | Ernst & Young LLP — Unqualified, serving since 2002 |
The Distribution Machine: Thin Margins, Huge Volume
Sysco's business model is straightforward: buy food from producers, distribute it to restaurants, hospitals, and institutions. Per the filing, "A majority of our sales orders are filled within 24 hours of receipt."
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Sales | $81,370M | $78,844M | $76,325M |
| Gross Profit | $14,969M | $14,608M | $13,955M |
| Gross Margin | 18.4% | 18.5% | 18.3% |
| Operating Income | Decreased 3.6% from FY2024 | — | — |
| Net Income | $1,828M | $1,955M | $1,770M |
| Net Margin | 2.2% | 2.5% | 2.3% |
Per the filing, operating income decreased 3.6% compared to fiscal 2024 "primarily due to a noncash goodwill impairment charge in our Guest Worldwide business." Adjusted operating income increased 1.2%.
Gross margin is razor-thin at 18.4% — typical for food distribution where "cost of goods sold primarily includes inventory costs (net of supplier consideration) and inbound freight." The business earns its keep on volume, not margin.
Cash Flow: Consistently Converting Earnings to Cash
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Operating Cash Flow | $2,510M | $2,989M | $2,868M |
| Net Income | $1,828M | $1,955M | $1,770M |
| CFFO / NI | 1.37 | 1.53 | 1.62 |
| CapEx | $906M | $832M | $793M |
| Free Cash Flow | $1,604M | $2,157M | $2,075M |
CFFO/NI ratios of 1.37-1.62 across three years demonstrate strong cash conversion. FCF declined 26% to $1.6 billion as CapEx grew 8.9% while CFFO dropped 16%. The CFFO decline from $2.99 billion to $2.51 billion warrants monitoring — even as revenue grew 3.2%, cash generation declined.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | ✅ | DSO 25 days, stable |
| A2 | AR vs Revenue Growth | ❌ | AR outpaced revenue for 2 consecutive years |
| A3 | Revenue vs CFFO | ✅ | Revenue +3.2%, CFFO -16.0% |
A2 red flag context: AR growing faster than revenue for two straight years in a distribution business can signal loosening credit terms to customers — often restaurants under financial pressure. With DSO stable at 25 days and total AR at $5.5 billion (allowance of $17 million), the absolute dollar risk is manageable, but the trend demands monitoring.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | Inventory +8.0% vs COGS +3.4% |
| B2 | CapEx vs Revenue | ✅ | CapEx +8.9% vs revenue +3.2% |
| B3 | SG&A Ratio | — | Insufficient data |
| B4 | Gross Margin | ✅ | 18.4%, -0.1pp, stable |
Inventory of $5.1 billion (up from $4.7 billion) grew faster than COGS but remains within normal bounds for a distributor managing product mix and inflation.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 1.37, profits backed by cash |
| C2 | Free Cash Flow | ✅ | FCF $1.6B, FCF/NI = 0.88 |
| C3 | Accruals Ratio | ✅ | -2.5%, low accruals |
| C4 | Cash vs Debt | ❌ | Cash $1.1B covers 7% of $14.5B debt |
C4: Total debt grew from $12.9 billion to $14.5 billion over FY2024-2025. Cash improved from $696 million to $1.1 billion, but coverage remains thin at 7%. For a company with this much recurring revenue and cash flow, this is a business model choice rather than distress — but it leaves no margin for a liquidity crisis.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ❌ | $6.3B = 345% of equity |
| D2 | Leverage | ✅ | Debt/EBITDA = 3.5x, interest coverage 4.9x |
| D3 | Soft Asset Growth | ✅ | Other assets +17.2% vs revenue +3.2% |
| D4 | Asset Impairment | — | No structured data |
D1: Goodwill of $5.2 billion and intangibles of $1.1 billion total $6.3 billion — 345% of the thin $1.8 billion equity base. This is common for acquisitive distributors. Sysco's equity is thin because it returns capital aggressively through buybacks and dividends while maintaining leverage. Debt/EBITDA of 3.5x is reasonable.
The Guest Worldwide goodwill impairment mentioned in the filing signals that at least one acquired business is underperforming expectations.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF after acquisitions positive |
| E2 | Goodwill Surge | ✅ | Goodwill+Intangibles flat YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | — | Insufficient data |
Key Risks from the 10-K
1. Restaurant Industry Cyclicality and Tariffs
The filing warns that "changes in global trade policies and tariffs, can depress demand, sales and/or gross margins" and that "food cost and fuel cost inflation can lead to reductions in the frequency of dining out." Sysco's revenue depends on restaurant traffic. Any recession that reduces dining out directly compresses Sysco's top line with limited ability to cut costs.
2. Transformation and Restructuring Costs
Results were "negatively impacted by" restructuring charges, transformation initiative expenses, severance charges, and acquisition-related costs. The filing describes "expenses associated with our various transformation initiatives" as a recurring adjustment. When transformation costs appear every year, they are not one-time expenses — they are part of the ongoing cost structure.
3. Credit Risk on Restaurant Customers
With $5.5 billion in accounts receivable and "credit terms to some of our customers based on our assessment of each customer's creditworthiness," Sysco carries meaningful counterparty risk. Restaurant failure rates are historically elevated. The filing notes allowances of only $17 million — extremely thin relative to total AR.
4. Fuel and Labor Cost Inflation
As a distribution company, Sysco's two largest variable costs are fuel and labor. The filing acknowledges exposure to commodity cost inflation and supply chain disruption, both of which directly compress the already-thin 18.4% gross margin.
Summary
Grade: F under the screening framework, driven by structural balance sheet characteristics of a leveraged food distributor.
Sysco's operations are solid: 18.4% gross margins are stable, cash conversion is consistently above 1.0x, free cash flow is $1.6 billion, and the core business grew 3.2%. The Guest Worldwide goodwill impairment is a blemish but not a crisis.
The F grade reflects three quantitative flags: AR outpacing revenue for two years, cash covering only 7% of $14.5 billion debt, and goodwill+intangibles at 345% of equity. The Altman Z-Score of 2.94 is safely above the distress threshold, suggesting these flags are more about capital structure aggressiveness than financial distress. Debt/EBITDA at 3.5x and interest coverage at 4.9x are both manageable.
The biggest real risk is a recession that reduces restaurant traffic and simultaneously stresses Sysco's restaurant customers who owe it $5.5 billion.
**Disclaimer**: This report is based on Sysco's FY2025 10-K filed with SEC EDGAR on August 22, 2025. 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: June 28, 2025