CarMax Inc. (KMX) is a retailer of used cars. More than 80% of the company's revenues come from sales of used cars, while wholesale and new vehicles cars make up the rest, according to the latest 10-Q report. CarMax is a business that will be hit hard once the Fed raises the rate: both financially and operationally. In fact, the market has already erased the stock's gains for the year, and I think it can go a lot lower: (Source: Bloomberg) There are two problems with the company: - It is very indebted - the D/E ratio is about 3.0x, while the industry's average is less than 1.5x. This high leverage artificially inflates the company's ROE, which is currently at about 19%. Once the D/E ratio is adjusted, the figure falls to about 12%. This is significantly lower than the industry average. - Its sales are very dependent on the availability of cheap credit. In the last six months, more than 10% of revenue came from credit sales. In the cash flow statement, we can see that very well: (Source: 10Q Report) As readers can see, the company is actually losing money from operations, although the recent result is a lot better than the previous year's. The single biggest headwind is the increase in loans receivable - essentially, debt owed to the company by its clients. As sales grow, so does this account because new debt drives a good chunk of the company's revenues. Turning to the other two segments of the statement, we see the following picture: (Source: 10Q Report) Of course, the company's CapEx grew - this is understandable. As the company grows, it invests more money into working capital or PP&E in order to grow production and revenues. However, notice in the Financing Activities that CarMax routinely issues and repays debt. Moreover, it issues more debt than retires. This is because it has to finance its operating activities - the company reinvests its profits entirely AND needs more money to finance growth. The best way to do that, of course, is to raise debt because: (1) it is cheap (now) and (2) it does not dilute owners' interests in the company's equity (and assets). In other words, in order for this company to grow, it needs to keep on raising cheap debt. I also assume that credit sales will take a bigger part of total sales in the future. Needless to say, CarMax does not have any cash left over to pay dividends and/or repurchase share. This will not happen until it reaches some sort of critical mass when it will be able to finance growth on its own. On top of that, here is fun fact for you: the current EV/EBITDA multiple for the company is nearly 19.0x, while the industry, let alone the market, has the multiple at 12.5x. To sum up, CarMax is a growing company that owes its expansion to the availability of cheap credit. Its operating results are inflated because of the company's highly-leveraged capital structure. Finally, its valuation is also off the charts with a ridiculous enterprise multiple. Even if you do not think that the company is a strong SELL, you clearly have no reason to believe it has explosive growth ahead of it.