Is CME Group Berhad (KLSE:CME) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CME Group Berhad (KLSE:CME) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CME Group Berhad

What Is CME Group Berhad's Debt?

You can click the graphic below for the historical numbers, but it shows that CME Group Berhad had RM20.6m of debt in March 2021, down from RM24.3m, one year before. On the flip side, it has RM2.01m in cash leading to net debt of about RM18.6m.

How Healthy Is CME Group Berhad's Balance Sheet?

The latest balance sheet data shows that CME Group Berhad had liabilities of RM40.8m due within a year, and liabilities of RM7.67m falling due after that. Offsetting these obligations, it had cash of RM2.01m as well as receivables valued at RM16.2m due within 12 months. So it has liabilities totalling RM30.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM38.7m, so it does suggest shareholders should keep an eye on CME Group Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CME Group Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year CME Group Berhad had a loss before interest and tax, and actually shrunk its revenue by 89%, to RM5.6m. To be frank that doesn't bode well.

Caveat Emptor

Not only did CME Group Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM2.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM17m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for CME Group Berhad (2 are concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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