Are America’s Car-Mart Inc’s (NASDAQ:CRMT) Interest Costs Too High?
America’s Car-Mart Inc (NASDAQ:CRMT) is a small-cap stock with a market capitalization of US$471.37m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CRMT here.
How much cash does CRMT generate through its operations?
CRMT has built up its total debt levels in the last twelve months, from US$118.61m to US$0 – this includes both the current and long-term debt. With this rise in debt, CRMT currently has US$1.02m remaining in cash and short-term investments for investing into the business. Additionally, CRMT has produced US$9.99m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 6.54%, signalling that CRMT’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CRMT’s case, it is able to generate 0.065x cash from its debt capital.
Can CRMT pay its short-term liabilities?
At the current liabilities level of US$29.85m liabilities, the company has been able to meet these obligations given the level of current assets of US$426.64m, with a current ratio of 14.29x. Though, anything about 3x may be excessive, since CRMT may be leaving too much capital in low-earning investments.
Does CRMT face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 66.20%, CRMT can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CRMT’s case, the ratio of 7.96x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CRMT ample headroom to grow its debt facilities.
Next Steps:
CRMT’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for CRMT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research America’s Car-Mart to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CRMT’s future growth? Take a look at our free research report of analyst consensus for CRMT’s outlook.
Historical Performance: What has CRMT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
