Online car dealer Carvana (CVNA -2.23%) has suffered one of the sharpest drops of any stock in this bear market. Its shares are currently down almost 99% from their highs. Wall Street is rightly concerned about the company's financial health. Carvana's debt is trading at less than 50 cents on the dollar, a sign that bond investors aren't confident that the company will pay back its loans.

So how dire is Carvana's situation, and can investors expect (or at least hope for) a long-term recovery? Fortunately, we can use data to paint a picture of the company's troubles and look at the hard road ahead. Don't buy or sell the stock before getting the complete picture below.

Why Carvana is struggling

Carvana stock traded north of $350 per share during the height of the pandemic. Fiscal stimulus and supply shortages created surging demand (and prices) for used vehicles. Meanwhile, low interest rates meant cheap debt that Carvana could use to fund rapid growth. It was a dream scenario for the company.

Carvana could pay whatever it needed to obtain inventory, and rapidly rising car prices meant it could still sell for juicy profit margins. You can see below how quickly Carvana's revenue and debt load increased from 2020 to 2022.

Chart showing major rise in Carvana's revenue and total long-term debt since 2020.

CVNA Revenue (TTM) data by YCharts

But nothing lasts forever. The used vehicle market peaked about a year ago and has declined throughout 2022. The Federal Reserve Board's decision to raise interest rates aggressively to combat inflation only dumped cold water on the smoldering market. Of course, higher rates make car loans more expensive (higher interest) and generally cool the economy altogether. High prices and expensive debt will reduce demand; less demand means falling car prices.

Carvana is now stuck with all of these cars it bought at higher prices, which are now potentially depreciating. The company must cut prices to move the inventory. You can see the effect below -- gross profit margins have declined steadily throughout 2022.

Chart showing Carvana's gross profit margin dropping steeply in 2022.

CVNA Gross Profit Margin data by YCharts

A downturn in the used vehicle market is the most significant risk facing Carvana and its shareholders. Not only do sinking car prices hurt, but selling fewer cars means fewer units to spread across Carvana's fixed costs (like overhead and salaries). The company sold 15,000 fewer units in the third quarter of 2022 than in the second. Cash losses could worsen if car sales continue slowing down.

Will things get easier or harder?

All this paints a potentially tough picture. You can see below that used vehicle prices have come down, but there is still a ton of room for them to fall to pre-pandemic levels. Not only will Carvana face potential losses as it sells its current inventory, but it risks losing money on future inventory if it can't buy and sell cars fast enough in a down market. You can see below how large the gap is in pricing from pre-pandemic levels -- and what if higher rates push prices below that? Investors should consider these scenarios.

Chart showing the U.S. Consumer Price Index for Used Cars and Trucks rising since 2020, with recent drop, and the Effective Federal Funds Rate crashing in 2020 and rebounding in 2022.

U.S. Consumer Price Index: Used Cars and Trucks data by YCharts

But the risks to the business go beyond that. Selling car loans is a big part of Carvana's business, including $5.6 billion in loan proceeds through nine months of 2022. If you finance a car with Carvana, the company doesn't keep your loan on its books. Instead, it lumps loans together into securities and sells them to investors. But an increasingly shaky lending environment could make it harder for Carvana to find buyers for its loans (or sell them profitably), much like what lending platform Upstart has experienced in its business this year.

What should you do with Carvana stock?

The double whammy of falling inventory value and a tighter credit market puts pressure on Carvana. The company has $316 million in cash and equivalents and $2.5 billion in vehicle inventory. Meanwhile, Carvana burned $188 million in cash last quarter. Investors will need to watch closely to see how the financials progress. Carvana will try to reduce cash burn as much as possible, but it's unclear how much time that will buy the company.

Carvana may seek to restructure its debt for financial relief. The company's 10 largest creditors recently agreed to work together should these negotiations occur. These preparations may be cautionary, but they could signal that creditors are worried about Carvana's ability to get through its hardship unscathed.

Any debt restructuring could potentially wipe out investors, so Carvana's 99% price decline truly reflects how risky the stock is. Investors should proceed with caution, recognize that Carvana is a distressed business, and only invest money they are comfortable losing on the stock.