Is CME Group Berhad (KLSE:CME) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that CME Group Berhad (KLSE:CME) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt 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 as of March 2024 CME Group Berhad had RM35.7m of debt, an increase on RM29.8m, over one year. However, it does have RM7.72m in cash offsetting this, leading to net debt of about RM28.0m.

A Look At CME Group Berhad's Liabilities

According to the last reported balance sheet, CME Group Berhad had liabilities of RM58.5m due within 12 months, and liabilities of RM2.74m due beyond 12 months. On the other hand, it had cash of RM7.72m and RM10.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM43.2m.

The deficiency here weighs heavily on the RM26.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, CME Group Berhad would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CME Group Berhad will need earnings to service that debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 55%, to RM20m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, CME Group Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM467k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through RM7.1m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example CME Group Berhad has 4 warning signs (and 3 which can't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.