Grade: C — Some Red Flags, Investigate
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2025-10-22, FY ended August 31, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion (2 Critical Audit Matters)
One-line verdict: FactSet is a financial data and analytics provider generating $597M in net income on $2.3B in revenue, with a subscription-based model delivering Annual Subscription Value (ASV) of $2,370.9 million and retention above 95%. Two screening checks fail: cash covers only 23% of debt, and goodwill plus intangibles total 146% of equity. But the M-Score of -2.40 narrowly clears the manipulation threshold (just 0.18 above -2.22), and AR grew 18.7% against revenue growth of 5.4%. The leverage is real — Debt/EBITDA of 1.6x is manageable but cash reserves are thin. For a subscription business with 95%+ retention, these concerns are moderated by the predictability of the revenue stream.
| Metric | Result |
|---|---|
| Red Flags | **2** (C4: Cash/debt coverage, D1: Goodwill/equity) |
| Watch Items | **2** (A2: AR vs revenue, B2: CapEx surge) |
| Checks Completed | **17/18** (1 N/A) |
| Beneish M-Score | **-2.40** (marginal pass; threshold -2.22) |
| Altman Z-Score | **N/A** (not applicable to financial data companies classified as financial services) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
Note on Z-Score: The Altman Z-Score is not applicable to FactSet. While classified in Financial Services, FactSet operates as a data/technology provider and the Z-Score model was designed for manufacturing firms. The M-Score *is* applicable and provides a meaningful signal — though the marginal pass at -2.40 warrants attention.
A Subscription Data Business
Per the 10-K, FactSet provides "multi-asset solutions powered by our platform of connected data and technology." The majority of revenues derive from "client access... that is available over the contractual term."
Key operating metrics from the filing:
The high retention rates (95% by revenue, 91% by clients) confirm the stickiness of FactSet's data platform. Once embedded in a client's workflow, switching costs are substantial. The 4-5% gap between revenue retention and client retention indicates FactSet loses smaller clients while retaining larger ones — a healthy mix shift.
Profitability: Steady but Slow Growth
| Metric | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|
| Total Revenue | $2.1B | $2.2B | $2.3B | +5.4% YoY |
| Net Income | $468M | $537M | $597M | +11.2% |
| Gross Margin | 53.3% | 54.1% | 52.7% | Slight compression |
| Net Margin | 22.4% | 24.4% | 25.7% | Expanding |
| ROE | 28.9% | 28.1% | 27.3% | Slightly declining |
Revenue growth of 5.4% matches the organic ASV growth rate of 5.7%, confirming that the top line is growing organically without acquisition-driven inflation. Net margin expansion from 22.4% to 25.7% despite gross margin compression indicates excellent cost discipline below the gross profit line.
The filing mentions ASV calculations exclude "ASV from acquisitions and dispositions completed within the last 12 months and the effects of foreign currency movements," providing a clean organic growth picture.
Cash Flow: Consistent
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $646M | $700M | $726M |
| Net Income | $468M | $537M | $597M |
| **CFFO / Net Income** | **1.38** | **1.30** | **1.22** |
| Free Cash Flow | $585M | $615M | $617M |
| Accruals Ratio | — | — | **-3.0%** |
CFFO/NI of 1.22 confirms profits are cash-backed. The ratio has declined from 1.38, which reflects growing CapEx requirements ($109M increase over three years) but remains healthy. The negative accruals ratio of -3.0% is clean.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | ✅ | DSO 43 days, +5 days YoY |
| A2 | AR vs Revenue Growth | ⚠️ | AR +18.7% vs revenue +5.4% |
| A3 | Revenue vs CFFO | ✅ | Revenue +5.4%, CFFO +3.7% |
A2 watch item. AR growing at 3.5x the rate of revenue is notable. For a subscription business, this could reflect: (1) timing of annual renewals — if more clients renewed near fiscal year-end, the AR balance would spike, (2) acquisitions bringing new receivables, or (3) longer collection terms. DSO at 43 days (+5) is still reasonable for B2B software/data services. Goodwill surged 12% (from $1.0B to $1.3B), suggesting an acquisition that may explain part of the AR increase.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | No inventory |
| B2 | CapEx vs Revenue | ⚠️ | CapEx +27.0% vs revenue +5.4% |
| B3 | SG&A Ratio | ✅ | SG&A/Gross Profit = 38.9% |
| B4 | Gross Margin | ✅ | 52.7%, -1.3pp. Minor |
B2 watch item. CapEx growing 5x faster than revenue suggests investment in platform infrastructure, data center capacity, or AI capabilities. Per the filing, FactSet invests heavily in its connected data platform. This is a discretionary investment, not a red flag, but if it doesn't translate to revenue acceleration, it represents margin compression.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 1.22 |
| C2 | Free Cash Flow | ✅ | FCF $617M, FCF/NI = 1.03 |
| C3 | Accruals Ratio | ✅ | -3.0%. Low |
| C4 | Cash vs Debt | ❌ | Cash $0.4B covers only 23% of debt $1.6B |
C4 is a red flag. Cash of $400M covers only 23% of $1.6B in total debt. For a company generating $617M in annual free cash flow, the debt is serviceable (Debt/EBITDA 1.6x), but the thin cash buffer means any disruption in cash generation would create immediate refinancing pressure.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ❌ | $3.2B = 146% of equity |
| D2 | Leverage | ✅ | Debt/EBITDA = 1.6x |
| D3 | Soft Asset Growth | ✅ | Other assets +17.8% vs revenue +5.4% |
| D4 | Asset Impairment | — | N/A |
D1 flag. Goodwill of $1.3B and intangible assets of approximately $1.9B total $3.2B — 146% of equity. Goodwill increased 12% from $1.0B, reflecting a recent acquisition. The filing notes goodwill is tested "annually for impairment during the fourth quarter of each fiscal year or more frequently if events and circumstances occur indicating that it is more likely than not that the fair value of any one of our reporting units is less than its respective carrying value."
The filing also notes 38 mentions of "material weakness" — though these are in the context of standard risk factor disclosures about internal controls, not actual identified weaknesses.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF after acquisitions positive |
| E2 | Goodwill Surge | ✅ | +12% YoY (below 50% threshold) |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | ✅ | -2.40 (marginal pass) |
The M-Score of -2.40 is concerning. It clears the -2.22 threshold by only 0.18. The AR growth driving A2's watch flag is also contributing to the elevated DSRI component. While the overall score passes, the marginal nature of the pass means any further deterioration in AR relative to revenue would push the score into manipulation territory.
Key Risks from the 10-K
1. Competitive Pressure in Financial Data
The filing identifies "The market for our solutions is intensely competitive" as a primary risk. FactSet competes with Bloomberg, Refinitiv (LSEG), S&P Capital IQ, and emerging AI-powered alternatives. If competitors offer superior or cheaper alternatives, retention rates could decline.
2. AI Disruption
Financial data is being disrupted by AI-powered analytics. The filing mentions investment in platform capabilities. FactSet must invest aggressively in AI or risk commoditization of its data products. The 27% CapEx growth may reflect this defensive investment.
3. Thin Cash Buffer
At 23% cash coverage of debt, FactSet is reliant on consistent free cash flow generation. The 95%+ retention rate provides confidence in revenue predictability, but any unexpected client losses, acquisition integration issues, or macroeconomic shock could strain liquidity.
Summary
Grade: C. Solid subscription business with leverage and marginal M-Score concerns.
FactSet's core business is strong: 95%+ retention, 5.7% organic ASV growth, and consistent free cash flow. But the balance sheet carries real concerns: cash covers only 23% of debt, goodwill and intangibles exceed equity by 46%, and the M-Score of -2.40 barely passes.
The engine assigns Grade F (two fails), which we moderate to C because: (1) the subscription model provides revenue predictability that traditional metrics understate, (2) Debt/EBITDA of 1.6x is manageable, (3) CFFO/NI of 1.22 confirms earnings quality, and (4) the goodwill increase is moderate (12%). However, the marginal M-Score and thin cash buffer prevent a B grade. Monitor AR growth relative to revenue and the cash position over the next two quarters.
**Disclaimer**: This report is based on FactSet's FY2025 10-K filed with SEC EDGAR on October 22, 2025. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion, 2 Critical Audit Matters)
Fiscal year ended: August 31, 2025