Shareholders of America's Car-Mart would probably like to forget the past six months even happened. The stock dropped 35% and now trades at $42.03. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Even with the cheaper entry price, we're cautious about America's Car-Mart. Here are three reasons why there are better opportunities than CRMT and one stock we like more.

Why Is America's Car-Mart Not Exciting?

With a strong presence in the Southern and Central US, America’s Car-Mart (NASDAQ:CRMT) sells used cars to budget-conscious consumers.

1. Low Gross Margin Reveals Weak Structural Profitability

At StockStory, we prefer high gross margin businesses because they indicate pricing power or differentiated products, giving the company a chance to generate higher operating profits.

America's Car-Mart has poor unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 16% gross margin over the last two years. That means America's Car-Mart paid its suppliers a lot of money ($83.99 for every $100 in revenue) to run its business.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) tells us whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for America's Car-Mart, its EPS declined by 23.1% annually over the last five years while its revenue grew by 15.2%. This tells us the company became less profitable on a per-share basis as it expanded.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

America's Car-Mart’s $184.8 million of debt exceeds the $4.75 million of cash on its balance sheet. Furthermore, its 6x net-debt-to-EBITDA ratio (based on its EBITDA of $29.35 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. America's Car-Mart could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope America's Car-Mart can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

America's Car-Mart isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 14.3x forward price-to-earnings (or $42.03 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend taking a look at Nextracker, the market leader in utility-scale solar trackers and foundations.

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