Grade: B — Generally Healthy, Minor Concerns
Framework: Schilit *Financial Shenanigans* + forensic accounting principles (exchange/market infrastructure analysis)
Data: SEC EDGAR 10-K (Filed 2026-02-20, FY ended December 31, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion (1 Critical Audit Matter)
One-line verdict: Cboe is a capital-light exchange operator generating $1.1B in net income on $4.7B in revenue, with a CFFO/NI ratio of 1.59 and free cash flow of $1.7B. Revenue grew 15.1% driven by record derivatives volumes, particularly in SPX options and VIX products. The one screening flag — goodwill and intangibles at 87% of equity — reflects the 2017 Bats Global Markets acquisition, not ongoing acquisition risk. Cash of $2.3B exceeds total debt of $1.6B. The M-Score of -3.01 is deeply clean, and the accruals ratio of -7.0% signals high earnings quality. The only meaningful risk is revenue concentration in proprietary index products whose volumes are cyclically sensitive.
| Metric | Result |
|---|---|
| Red Flags | **1** (D1: Goodwill+Intangibles high relative to equity — legacy acquisition) |
| Watch Items | **0** |
| Checks Completed | **18/18** |
| Beneish M-Score | **-3.01** (clean; threshold -2.22) |
| Altman Z-Score | **N/A** (not applicable to financial exchanges) |
| Auditor | Ernst & Young LLP — Unqualified opinion |
Note on M-Score and Z-Score for financials: The Beneish M-Score is shown here because Cboe operates as a technology and exchange platform (not a bank or insurer), so the model's inputs are meaningful. However, the Altman Z-Score is not applicable to financial services companies, as the model was designed for manufacturing firms with fundamentally different balance sheet structures.
The Toll Booth of Global Derivatives
Cboe operates the world's largest options exchange. Per the 10-K, the company runs three reportable business segments:
| Segment | FY2025 Revenue | Description |
|---|---|---|
| Derivatives Markets | Largest segment | Transaction and clearing fees on options/futures, including proprietary SPX and VIX products |
| Cash and Spot Markets | Mid-tier | Equities, FX, and clearing business |
| Data Vantage | Growing | Market data, analytics, and indices |
The filing states that one clearing firm represented 12% of clearing and transaction fees revenue in 2025. Transaction and clearing fees included $283 million from regulatory fees passed through to regulators.
The business model is essentially a toll booth: Cboe earns fees on every contract traded. Record average daily volume drives revenue. This creates operating leverage — once the platform is built, incremental transactions carry near-zero marginal cost.
Profitability: Record Year
| Metric | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|
| Total Revenue | $3.8B | $4.1B | $4.7B | +15.1% YoY |
| Net Income | $761M | $765M | $1.1B | +43.8% |
| Gross Margin | 39.5% | 39.3% | 40.9% | Expanding |
| Net Margin | 20.2% | 18.7% | 23.3% | Sharp improvement |
| ROE | 19.1% | 17.9% | 21.4% | Strong |
Operating income for FY2025 was $1,467 million, compared with $1,098 million in FY2024. The 34% jump in operating income on 15% revenue growth reflects the inherent operating leverage in an exchange model. Gross margin expanded 1.6 percentage points.
The filing recorded a $46.7 million write-off related to impairment of capital assets and a $92.8 million gain on sale of securities. These largely offset, leaving core operating performance as the driver.
Cash Flow: Pristine Quality
| Metric | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Operating Cash Flow | $1.1B | $1.1B | $1.8B |
| Net Income | $761M | $765M | $1.1B |
| **CFFO / Net Income** | **1.41** | **1.44** | **1.59** |
| Free Cash Flow | $1.0B | $1.0B | $1.7B |
| Accruals Ratio | — | — | **-7.0%** |
CFFO/NI of 1.59 means that for every dollar of reported profit, $1.59 in cash actually arrived. This is excellent. The negative accruals ratio of -7.0% confirms that reported earnings are conservative relative to cash generation.
Cash of $2.3B versus total debt of $1.6B gives Cboe a net cash position. The balance sheet carries no financial stress whatsoever.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | ✅ | DSO 30 days, -9 days YoY. Getting paid faster |
| A2 | AR vs Revenue Growth | ✅ | AR -12.0% vs revenue +15.1%. AR shrinking while revenue grows |
| A3 | Revenue vs CFFO | ✅ | Revenue +15.1%, CFFO +59.2%. Cash far outpacing revenue |
All three revenue quality checks pass cleanly. AR declining while revenue surges is the opposite of a red flag — it means Cboe is collecting faster as volumes increase.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | ✅ | No material inventory (exchange model) |
| B2 | CapEx vs Revenue | ✅ | CapEx growth 16.6% vs revenue 15.1%. Normal |
| B3 | SG&A Ratio | ✅ | SG&A/Gross Profit = 6.9%, excellent |
| B4 | Gross Margin | ✅ | 40.9%, +1.6pp. Expanding |
SG&A at 6.9% of gross profit is among the lowest we've seen across any company. This reflects the asset-light exchange model — Cboe doesn't need a large sales force to generate transactions.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | ✅ | CFFO/NI = 1.59. Profits strongly backed by cash |
| C2 | Free Cash Flow | ✅ | FCF $1.7B, FCF/NI = 1.53 |
| C3 | Accruals Ratio | ✅ | -7.0%. Low accruals |
| C4 | Cash vs Debt | ✅ | Cash $2.3B covers debt $1.6B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | ❌ | $4.5B = 87% of equity |
| D2 | Leverage | ✅ | Debt/EBITDA = 0.9x |
| D3 | Soft Asset Growth | ✅ | Other assets -10.3% vs revenue +15.1% |
| D4 | Asset Impairment | ✅ | Write-offs normal |
D1 is the only flag. Goodwill of $3.15B and intangible assets of $1.34B total $4.5B — 87% of shareholders' equity. This originates primarily from the 2017 Bats Global Markets acquisition for approximately $3.4B. The goodwill has remained stable ($3.1B in FY2023 and FY2024, $3.15B in FY2025), showing no surge and no acquisition spree. Per the filing, goodwill is tested for impairment annually in Q4. At 0.9x Debt/EBITDA and interest coverage of 29.0x, the leverage is trivial despite the goodwill-heavy balance sheet.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | ✅ | FCF after acquisitions positive |
| E2 | Goodwill Surge | ✅ | Goodwill change -1% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | ✅ | -3.01 (clean) |
M-Score of -3.01 is deeply below the -2.22 manipulation threshold. All components are benign: DSRI 0.77, GMI 0.96, AQI 0.77, SGI 1.15, DEPI 1.06, SGAI 0.83, TATA -0.07, LVGI 1.12.
Key Risks from the 10-K
1. Revenue Concentration in Proprietary Products
Cboe's competitive advantage — its proprietary SPX and VIX products — is also its concentration risk. The filing warns about decreases in market data revenue "as a result of decreased demand or changes to regulations in various jurisdictions" and "changes in our rate per contract due to shifts in the mix of the products traded." If volatility declines for an extended period, derivatives volumes fall, and so does Cboe's revenue.
2. Digital Assets Uncertainty
The filing references Cboe Digital and digital asset exposure. The filing recorded an impairment of $46.7 million on capital assets. Digital asset markets remain regulatory uncertain, and Cboe's investments in this space carry write-down risk.
3. Regulatory and Competitive Risks
As a regulated exchange, Cboe faces ongoing regulatory changes that could impact fee structures. The filing notes risks from "the failure to manage compliance with the extensive and evolving regulatory requirements" across multiple jurisdictions.
Summary
Grade: B. Clean financials with a legacy goodwill flag that does not indicate current risk.
Cboe delivered a record year: revenue up 15.1%, net income up 43.8%, and free cash flow of $1.7B. The CFFO/NI ratio of 1.59 is outstanding. Cash exceeds debt. SG&A is trivial. The M-Score is deeply clean at -3.01.
The D1 flag on goodwill/intangibles at 87% of equity is from the 2017 Bats acquisition — it has been stable for years, is not growing, and is supported by consistent cash generation. This is a structural characteristic of the balance sheet, not a red flag for earnings quality.
The override from C to B reflects the stability of the goodwill (no surge, no serial acquisition pattern), the strength of cash flow conversion, and the asset-light nature of an exchange business where goodwill represents franchise value that is clearly generating returns.
**Disclaimer**: This report is based on Cboe's FY2025 10-K filed with SEC EDGAR on February 20, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion, 1 Critical Audit Matter)
Fiscal year ended: December 31, 2025