Grade: B+ — Healthy, Acquisition-Driven Intangibles
Framework: Financial data/ratings agency analysis + Schilit earnings quality principles
Data: SEC EDGAR 10-K (Filed 2026-02-18) + Yahoo Finance
Auditor: KPMG LLP — Clean opinion
One-line verdict: Moody's delivered strong results in 2025 — revenue grew 8.9% to $7.72 billion, net income grew 19.6% to $2.46 billion, and diluted EPS rose 21.4% to $13.67. Operating income expanded 16.6% to $3.35 billion as the credit ratings business (MIS) and analytics business (MA) both grew. Cash flow quality is excellent: CFFO/NI of 1.18x and accruals ratio of -2.8%. The main concern is the balance sheet structure: goodwill plus intangibles of $8.2 billion represent 203% of equity, and cash covers only 33% of debt. But Moody's operates an asset-light, high-margin business (operating margin 43.4%) where equity is suppressed by aggressive share buybacks. Debt/EBITDA at 1.9x is manageable. The F-Score at 0.49 (0.18% fraud probability) is among the lowest we have seen, indicating extremely low risk of financial misstatement.
| Metric | Result |
|---|---|
| Red Flags (Engine) | **2** (C4, D1) |
| Watch Items | **0** |
| Checks Completed | **17/18** |
| Beneish M-Score | **-2.48** (unlikely manipulator — near threshold) |
| F-Score (Fraud Probability) | **0.49** (0.18% probability — very low) |
| Altman Z-Score | **N/A** (not applicable to financial services companies) |
| Auditor | KPMG LLP — Unqualified opinion |
| Fiscal Year | 2025 (ended December 31, 2025) |
| Report Date | 2026-04-05 |
Important note on financial classification: Although classified under Financial Services, Moody's is a data analytics and credit ratings company — not a bank, insurer, or lender. It does not hold financial assets, extend credit, or take deposits. Standard earnings quality metrics are applicable, though the Altman Z-Score is excluded due to sector classification. The Beneish M-Score at -2.48 is near the -2.22 threshold and warrants monitoring.
Revenue Growth Across Both Segments
Per the Consolidated Statements of Operations:
| Metric | 2023 | 2024 | 2025 | Trend |
|---|---|---|---|---|
| Revenue | $5,916M | $7,088M | **$7,718M** | +8.9% |
| Operating Expenses | $1,687M | $1,945M | **$1,973M** | +1.4% |
| SG&A | $1,632M | $1,735M | **$1,803M** | +3.9% |
| D&A | $373M | $431M | **$480M** | +11.4% |
| Restructuring | $87M | $59M | **$108M** | +83.1% |
| Total Expenses | $3,779M | $4,213M | **$4,367M** | +3.7% |
| Operating Income | $2,137M | $2,875M | **$3,351M** | +16.6% |
| Operating Margin | 36.1% | 40.6% | **43.4%** | +2.8 ppt |
| Net Income (to MCO) | $1,607M | $2,058M | **$2,459M** | +19.5% |
| Diluted EPS | $8.73 | $11.26 | **$13.67** | +21.4% |
Revenue growth of 8.9% reflects continued issuance activity in the credit markets (driving MIS ratings revenue) and subscription growth in Moody's Analytics (MA). Operating margin expanded nearly 3 percentage points to 43.4% as revenue growth (8.9%) significantly outpaced expense growth (3.7%).
The restructuring charge of $108 million — up from $59 million — reflects ongoing cost optimization. The 10-K also notes "charges related to asset abandonment" of $3 million.
Cash Flow Quality: Strong
Per the screening engine:
| Cash Flow Metric | Value |
|---|---|
| CFFO/NI | 1.18x |
| FCF | $2.6B |
| FCF/NI | 1.05x |
| Accruals Ratio | -2.8% |
Cash flow conversion at 1.18x net income with a negative accruals ratio of -2.8% indicates high-quality earnings. The company generates more cash than it reports in income — the hallmark of conservative accounting.
Balance Sheet: Buyback-Depleted Equity
Per the screening results:
| Item | Value |
|---|---|
| Cash | $2.4B |
| Total Debt | $7.4B |
| Cash/Debt | 33% |
| Goodwill + Intangibles | $8.2B (203% of equity) |
| Debt/EBITDA | 1.9x |
The D1 flag (goodwill + intangibles at 203% of equity) is primarily a function of:
Debt/EBITDA at 1.9x is healthy, confirming the company is not overleveraged despite the optical debt concern. The debt is investment-grade and used to fund the asset-light business model.
The C4 flag (cash at 33% of debt) is a watch item. Moody's relies on cash flow generation to service debt rather than holding large cash balances.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 96 days, +3 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR growth 12.4% vs revenue growth 8.9% |
| A3 | Revenue vs CFFO | PASS | Revenue +8.9%, CFFO +2.2% |
| B1 | Inventory vs COGS | PASS | No material inventory |
| B2 | CapEx vs Revenue | PASS | CapEx growth 2.8% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 31.4% |
| B4 | Gross Margin | PASS | Gross margin 74.4%, +1.9pp |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.18 |
| C2 | Free Cash Flow | PASS | FCF $2.6B, FCF/NI = 1.05 |
| C3 | Accruals Ratio | PASS | -2.8%. Low accruals |
| C4 | Cash vs Debt | **FAIL** | Cash $2.4B covers 33% of debt $7.4B |
| D1 | Goodwill + Intangibles | **FAIL** | $8.2B = 203% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 1.9x |
| D3 | Soft Asset Growth | PASS | Other assets -37.9% |
| D4 | Asset Impairment | N/A | No write-off data |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill change +4% YoY |
| F1 | Beneish M-Score | PASS | M-Score = -2.48 (near threshold) |
Key Risks from the 10-K
1. Credit Market Cyclicality
Moody's Investors Service (MIS) revenue is tied to debt issuance volumes. In a credit contraction, ratings revenue could decline significantly — as demonstrated in 2023 when revenue was $5.92 billion versus $7.72 billion in 2025.
2. Regulatory and Legal Risk
Credit rating agencies face ongoing regulatory scrutiny globally. The 10-K notes restructuring charges and potential changes in the regulatory landscape for credit ratings.
3. Goodwill Impairment Risk
Goodwill of approximately $5.4 billion (within the $8.2 billion total intangibles) is subject to annual impairment testing. The 10-K defines reporting units at the operating segment or one level below. A significant downturn in the analytics business could trigger impairment.
4. M-Score Near Threshold
The Beneish M-Score at -2.48 is below the -2.22 manipulation threshold but closer than typical for a company of this quality. This is likely driven by the high D&A growth rate (11.4%) from amortization of acquired intangibles and the restructuring charges, rather than actual manipulation. Nevertheless, this metric should be monitored.
Summary
Grade: B+. Healthy earnings quality with strong margins, excellent cash flow conversion, and very low fraud probability.
Moody's is an asset-light, high-margin business with a near-duopoly position in credit ratings. The 2025 results demonstrate:
The balance sheet flags (goodwill/intangibles and cash/debt) are structural consequences of the acquisition-driven growth strategy and aggressive share repurchase program, not indicators of financial distress. Debt/EBITDA at 1.9x confirms leverage is manageable.
The M-Score near the threshold (-2.48 vs. -2.22) warrants monitoring but is likely explained by high intangible amortization rather than earnings manipulation.
**Disclaimer**: This report is based on Moody's Corporation's fiscal year 2025 10-K filed with the SEC on February 18, 2026. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade B+ means the company shows healthy earnings quality with very minor concerns.