One of the best ways to develop a picture of any company is with the SWOT analysis -- a look at a company's strengths, weaknesses, opportunities, and threats. Today, I'd like to focus on CarMax (Nasdaq: KMX), the used-car retailer that Goldman Sachs downgraded to "sell" in January, but in which Fool analyst Rich Smith still sees potential.

Strengths

  • Full range of service: CarMax offers extended service plans, auto finance, service/repair, and wholesale auction for vehicles that do not meet requirements.
  • Customer confidence: The company's focus on four core customer benefits (low, no-haggle prices; a broad selection; high-quality vehicles; and a customer-friendly sales process) results in high customer satisfaction and word-of-mouth promotion.
  • Appraisal strategy and sophisticated technology allow the company to provide inventory that reflects the taste of each market.

Weaknesses

  • Limitations: Because CarMax does not negotiate on prices (for either the trade-ins or purchases), it has limited levers to pull to affect customer behavior.
  • Financials: CarMax does not have the soundest balance sheet around, but it hasn't had problems servicing its debt. For the trailing 12 months ended in February, the company's cash from operating activities declined to $46 million from $265 million for the same time in 2009 because of mismanagement of costs by company executives.

Opportunities

  • New markets: The company plans to grow 15% to 20% per year. It will open three new stores in 2011; three to five in 2012; and five to 10 in 2013.

Used-car prices will continue to increase because of greater demand, but also because of a shortage of vehicles. This can be attributed mainly to the economic downturn, in which leasing declined substantially and was even banned by some manufacturers.

Threats

  • Economic conditions: The company is vulnerable to consumer credit availability and delinquency, interest rates, gas prices, and discretionary spending.
  • Capital: Changes in the availability or cost of capital and working capital financing is a threat to CarMax.
  • Competition: Competition includes publicly and privately owned new- and used-car dealers, as well as millions of private individuals.
  • Retail prices: Any significant changes in retail prices for used and new vehicles could reduce sales and profits. 
  • Inventory: "A reduction in the availability or access to sources of inventory would adversely affect our business," according to the company.

What parts of CarMax's SWOT need more detail? Fill in the blanks by using the comments section below.

Rebekah Hughes does not own any shares of CarMax, which is a Motley Fool Stock Advisor recommendation. Read about the Fool's disclosure policy here.