Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-20) + Yahoo Finance
Auditor: Ernst & Young LLP — Clean opinion (auditor since 2011)
One-line verdict: CDW earns an F grade with three fails and two watch items. Accounts receivable outpaced revenue for two consecutive years, cash of $619M covers only 11% of $5.8B in debt, and goodwill plus intangibles at $5.8B represent 224% of equity. The company operates with effectively negative tangible book value — a structural consequence of its 2007 leveraged buyout. While the underlying IT distribution business generates steady cash (CFFO/NI at 1.13, FCF of $1.1B), the financial structure carries material risk. M-Score at -2.34 passes but sits near the grey zone, and DSO jumped 13 days to 103 days — an unusually high collection period for a technology distributor.
| Metric | Result |
|---|---|
| Red Flags | **3** (AR outpacing revenue 2 years, cash covers 11% of debt, goodwill at 224% of equity) |
| Watch Items | **2** (DSO +13 days, soft asset growth 35% vs revenue 7%) |
| Checks Completed | **17/18** |
| Beneish M-Score | **-2.34** (passes but near grey zone) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
America's IT Solutions Provider
CDW is a leading multi-brand technology solutions provider in the United States, United Kingdom, and Canada. It acts as a sales channel partner for technology manufacturers, selling hardware, software, and services to corporate, government, education, healthcare, and small business customers.
From the 10-K: "We are vendor, technology, and consumption model unbiased, offering a broad selection of products and multi-branded IT solutions. Our solutions are delivered in physical, virtual, and cloud-based environments through approximately 10,500 customer-facing coworkers, including sellers, highly-skilled specialists, and engineers."
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $23.7B | $21.4B | $21.0B | $22.4B | +7% |
| Net Income | $1.1B | $1.1B | $1.1B | $1.1B | -1% |
| Gross Margin | 19.7% | 21.8% | 21.9% | 21.7% | -0.2pp |
| Net Margin | 4.7% | 5.2% | 5.1% | 4.8% | -0.3pp |
| ROE | 69.5% | 54.1% | 45.8% | 40.9% | Declining |
Revenue recovered 7% after two years of decline, but net income was essentially flat at $1.07B. The extremely high ROE (40.9%) reflects the leveraged capital structure with minimal equity, not operating superiority.
Segment Performance
From the 10-K: CDW has three reportable segments: Corporate (US private sector, >250 employees), Small Business (US, up to 250 employees), and Public (government, education, healthcare). CDW UK and CDW Canada are grouped in "Other."
From the 10-K: "Net sales increased $1,425 million, or 6.8%, with higher Net sales across all operating segments. Broadly, while economic and geopolitical uncertainty persists, all of our segments continued to experience improved customer spending during the period. The increase in customer demand drove Net sales growth primarily in notebooks/mobile devices, software, desktops, services, and netcomm products."
Cash Flow: Steady but Declining Trend
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $1,599M | $1,277M | $1,205M |
| Free Cash Flow | $1,451M | $1,155M | $1,088M |
| CFFO / Net Income | 1.45 | 1.19 | 1.13 |
CFFO declined for the second consecutive year despite revenue growth. CFFO/NI remains above 1.0, indicating profits are cash-backed, but the declining trend from 1.45 to 1.13 warrants monitoring.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO | Watch | DSO increased by 13 days to 103 days |
| A2 | AR vs Revenue | Fail | AR outpaced revenue for 2 consecutive years |
| A3 | Revenue vs CFFO | Pass | Revenue +6.8%, CFFO -5.6%. Cash follows revenue |
A1: DSO jumping from 89 to 103 days is concerning for a technology distributor. DSO of 103 days means CDW takes over three months to collect receivables — an unusually long collection cycle for a reseller. The trend is worsening: 78 days in FY2023, 89 days in FY2024, 103 days in FY2025.
A2: AR outpacing revenue for two consecutive years — when combined with the DSO expansion, this suggests either: (1) CDW is extending longer payment terms to win business, (2) customer mix is shifting toward slower-paying segments, or (3) revenue recognition is becoming more aggressive. The M-Score DSRI component at 1.151 supports the concern.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory | Pass | Inventory -6.9% vs COGS +7.0%. Normal |
| B2 | CapEx | Pass | CapEx growth -4.5% vs revenue 6.8%. Normal |
| B3 | SG&A Ratio | Pass | SG&A/Gross Profit = 66.0%. Normal |
| B4 | Gross Margin | Pass | Gross margin 21.7%, -0.2pp. Stable |
From the 10-K: "Gross profit increased $271 million, or 5.9%, due to higher Net sales, partially offset by lower gross profit margin. Gross profit margin decreased 20 basis points, to 21.7%, primarily driven by decreased rates in certain hardware categories."
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs NI | Pass | CFFO/NI = 1.13. Profits backed by cash |
| C2 | FCF | Pass | FCF $1.1B, FCF/NI = 1.02 |
| C3 | Accruals | Pass | Accruals ratio = -0.9%. Low |
| C4 | Cash vs Debt | Fail | Cash $619M covers only 11% of debt $5.8B |
C4: Cash of $619M covers only 11% of $5.8B in total debt. This is one of the lowest coverage ratios among technology companies. From the 10-K: CDW repaid "$211 million remaining aggregate principal amount of the 4.125% Senior Notes due 2025 at maturity" and entered a "new credit agreement consisting of a five year $2.25 billion senior unsecured revolving loan facility." However, the refinancing does not reduce the underlying leverage. Debt/EBITDA at 3.0x is manageable but approaching elevated territory, and interest coverage at 7.3x leaves limited cushion.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | Fail | $5.8B = 224% of equity |
| D2 | Leverage | Pass | Debt/EBITDA = 3.0x. Healthy |
| D3 | Soft Asset Growth | Watch | Other assets grew 34.9% vs revenue 6.8% |
| D4 | Impairment | N/A | No write-off data |
D1: Goodwill of $4.7B and intangibles of $1.2B total $5.8B — a staggering 224% of equity. CDW's equity base of $2.6B is artificially small due to the legacy LBO capital structure and decades of share buybacks funded by debt. Tangible book value is deeply negative. If market conditions deteriorate and goodwill requires impairment, CDW could face negative total equity. From the 10-K: The company warns that "to the extent the value of goodwill or identifiable intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets."
M&A Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Post-Acquisition FCF | Pass | FCF after acquisitions positive |
| E2 | Goodwill Surge | Pass | Goodwill+Intangibles change -2% YoY. Normal |
Beneish M-Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | M-Score | Pass | -2.34 (< -2.22, but close to grey zone) |
The M-Score at -2.34 passes but is only 0.12 points from the -2.22 threshold. The DSRI at 1.151 (rising receivables) and AQI at 0.945 are the primary drivers pushing the score toward the grey zone.
Key Risks from Item 1A
1. Technology spending cyclicality. From the 10-K: "Our future operating results may fluctuate significantly due to the volatility and rapidly changing state of the technology industry." CDW's revenue declined 10% from FY2022 to FY2024 before recovering.
2. AI disruption to distribution model. From the 10-K: CDW highlights "the development, adoption, or capabilities of artificial intelligence and the challenges related to its adoption" as a risk factor. If AI shifts IT purchasing patterns, CDW's reseller model could be disrupted.
3. Substantial competition. CDW's reseller business faces "substantial competition that could reduce our market share" from other distributors, direct-to-customer sales by OEMs, and cloud marketplace purchasing.
Altman Z-Score and F-Score
| Model | Score | Interpretation |
|---|---|---|
| Altman Z-Score | **1.16** | Grey zone (1.81-2.99). Elevated risk |
| F-Score (Dechow) | **2.21** | Low fraud probability (0.82%) |
The Z-Score at 1.16 is in the grey zone, reflecting the leveraged capital structure. The negative retained earnings component (-0.08) and low equity-to-liabilities ratio (0.19) drag the score down. The F-Score probability of 0.82%, while still low, is higher than most technology peers.
Summary
| # | Check | Result |
|---|---|---|
| A1-A3 | Revenue Quality | Watch-Fail-Pass |
| B1-B4 | Expense Quality | Pass-Pass-Pass-Pass |
| C1-C4 | Cash Flow Quality | Pass-Pass-Pass-Fail |
| D1-D4 | Balance Sheet | Fail-Pass-Watch-N/A |
| E1-E2 | M&A Risk | Pass-Pass |
| F1 | Beneish M-Score | Pass |
Grade: F. Three fails driven by leveraged capital structure, rising receivables, and minimal cash coverage of debt.
CDW's profile reveals a company with a solid underlying business wrapped in a highly leveraged financial structure:
The F grade is driven primarily by CDW's legacy LBO capital structure rather than current earnings manipulation. However, the AR deterioration and DSO expansion add a concerning overlay. Investors should monitor: (1) whether DSO stabilizes, (2) debt refinancing terms as rates evolve, and (3) goodwill impairment risk if market conditions weaken.
**Disclaimer**: This report is based on CDW's FY2025 10-K (SEC EDGAR) and public financial data. This is NOT investment advice.
Data: SEC EDGAR 10-K (Filed 2026-02-20) + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion, auditor since 2011)