Is CME Group Berhad (KLSE:CME) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, CME Group Berhad (KLSE:CME) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for CME Group Berhad

What Is CME Group Berhad's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 CME Group Berhad had debt of RM22.9m, up from RM16.5m in one year. However, because it has a cash reserve of RM1.44m, its net debt is less, at about RM21.5m.

A Look At CME Group Berhad's Liabilities

The latest balance sheet data shows that CME Group Berhad had liabilities of RM31.6m due within a year, and liabilities of RM3.99m falling due after that. Offsetting this, it had RM1.44m in cash and RM1.62m in receivables that were due within 12 months. So it has liabilities totalling RM32.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's RM30.0m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CME Group Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, CME Group Berhad made a loss at the EBIT level, and saw its revenue drop to RM9.4m, which is a fall of 7.0%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months CME Group Berhad produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping RM3.7m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of RM6.1m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with CME Group Berhad (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.