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Is CarGurus, Inc. (NASDAQ:CARG) As Strong As Its Balance Sheet Indicates?

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Mid-caps stocks, like CarGurus, Inc. (NASDAQ:CARG) with a market capitalization of US$4.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at CARG’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into CARG here.

Check out our latest analysis for CarGurus

Does CARG face the risk of succumbing to its debt-load?

Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. Generally, mid-cap stocks are considered financially healthy if its ratio is below 40%. For CarGurus, investors should not worry about its debt levels because the company has none! It has been operating its business with zero debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with CARG, and the company has plenty of headroom and ability to raise debt should it need to in the future.

NasdaqGS:CARG Historical Debt, July 2nd 2019
NasdaqGS:CARG Historical Debt, July 2nd 2019

Does CARG’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, CarGurus has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at CARG’s US$65m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$179m, with a current ratio of 2.74x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Interactive Media and Services companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Next Steps:

CARG has no debt in addition to ample cash to cover its short-term commitments. Its safe operations reduces risk for the company and shareholders, but some level of debt may also ramp up earnings growth and operational efficiency. I admit this is a fairly basic analysis for CARG's financial health. Other important fundamentals need to be considered alongside. You should continue to research CarGurus to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CARG’s future growth? Take a look at our free research report of analyst consensus for CARG’s outlook.

  2. Valuation: What is CARG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CARG is currently mispriced by the market.

  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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