America’s Car-Mart: Balance Sheet Trends in Fourth Quarter Earnings (NASDAQ: CRMT)

0

SasinParaksa/iStock via Getty Images

Introduction

If we look at a technical chart of American Car-Mart, Inc. (NASDAQ: CRMT) (Automotive & Financing Provider), stocks have been in an aggressive downward spiral since losing their 200-day moving average in August last year. Over the past six weeks or so, however, we’ve seen sales decline, so it will be interesting to see if the upcoming Q4 earnings announcement can provide the catalyst for stocks to finally rally here.

The GAAP EPS earnings estimate for the quarter is $3.17 on revenue of just over $310 million. Despite the fact that net earnings estimates have continued to be revised downwards for the fourth quarter in recent months, it is encouraging to see that the pace of these declines has slowed to some extent. While higher costs may be more easily passed on in business-to-business transactions, high inflation rates in the automotive industry (business-to-end-user transactions) can have a significant negative impact on demand due to supply issues. affordability for customers.

Suffice it to say that the cyclical nature of this industry means that it is often a waiting game for wage growth to catch up with inflation rates (thereby improving affordability for customers) or , probably more favorably, a deflationary event that would immediately cause underfunded prospects to return to the market.

This is why it is crucial to check the financial situation of companies such as Car-Mart in the United States to ensure that the company will be able to continue to pay its obligations if indeed this “waiting game” takes longer than expected to unfold.

Cash and cash equivalents

America’s Car-Mart reported $2.6 million in cash and cash equivalents in its most recent third quarter. Generally, the more cash on the balance sheet the better, as that capital can be used to buy back more shares of the company as well as acquire smaller players when the opportunity arises. Management said on its recent third-quarter earnings call that it intends to continue to make opportunistic buybacks. The number of shares outstanding currently stands at 6.44 million.

Net receivables

This item refers to sums due to the company for services already provided. Accounts receivable were $801 million at the end of the third quarter. As a result, Car Mart’s receivables represent approximately 70% of the company’s sales ($1.14 billion), which is high to say the least, and well above average. for American Car-Mart. This means that customer affordability is crucial for the automotive supplier, not only upstream for ongoing sales, but also downstream to support old deals which can indeed be paid for in full.

Current ratio

The current or liquidity ratio gives us a good read on whether the US Car-Mart is in a good position to meet its short-term obligations. The company’s current assets stood at $933 million at the end of its third quarter, while current liabilities stood at just $29 million. This gives us a current ratio of 32.17, which is actually above the US Car-Mart average. Additionally, the company’s quick ratio of 27.65 demonstrates the company’s ability to meet short-term debt without resorting to external financing or inventory liquidation ($120 million).

Factory owned equipment

Net property, plant and equipment was $103 million at the end of the company’s third quarter. While every business needs a minimum amount of capital expenditure to grow, the important trend here is to ensure that capital expenditure does not far exceed profit growth. Fortunately, net income has grown from $20 million in fiscal year 2017 to $110 million currently on a twelve-month average. Property, plant and equipment increased from $30 million to $103 million over the same period.

return on assets

We see evidence of the above trend through the return on assets profitability measure. ROA demonstrates how efficient the company’s assets have been when it comes to producing profits. Given that US Car-Mart’s total assets were $1.045 billion at the end of the third quarter, dividing the company’s earnings of $110 million by this number gives us an ROA of 10, 52%. This double-digit number is well above the industry’s ROA (6.06%) and is also above Car-Mart’s five-year average number of 8.75%.

long-term debt

Car-Mart’s long-term debt in the United States was $373 million at the end of its third fiscal quarter. Right off the bat, that sounds like a manageable number given that annual profit has now topped $100 million. Given that equity came in at $451 million over the same period. Car-Mart’s US debt-to-equity ratio currently stands at 0.82. Although debt has increased, strong earnings growth in recent years has meant that the interest coverage ratio has remained high (16.42 over the past four quarters on average). Suffice it to say that while earnings growth can stay ahead of the curve, opportunistic share buybacks should continue as a direction, as the CEO suggested in the company’s latest earnings presentation. .

Summary

Car-Mart’s U.S. shares are now trading just above six times forward GAAP earnings, which is cheap by any measure. Although the market is looking for more growth, trends in the company’s balance sheet demonstrate that the stock can weather this current cycle. Shareholders will be looking to see if a compelling fourth-quarter earnings advance can change the paradigm here. We look forward to continued coverage.

Share.

About Author

Comments are closed.