Credit Acceptance trades at $520.73 and has moved in lockstep with the market. Its shares have returned 8.3% over the last six months while the S&P 500 has gained 11.3%.

Is there a buying opportunity in Credit Acceptance, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Credit Acceptance Will Underperform?

We're sitting this one out for now. Here are three reasons we avoid CACC and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

Unfortunately, Credit Acceptance’s 2.5% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks.

2. EPS Growth Has Stalled

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Credit Acceptance’s flat EPS over the last five years was below its 2.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

Credit Acceptance currently has $6.47 billion of debt and $1.55 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 3.9×. We think this is dangerous - for a financials business, anything above 3.5× raises red flags.

Final Judgment

Credit Acceptance doesn’t pass our quality test. That said, the stock currently trades at 12× forward P/E (or $520.73 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.

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