America's Car-Mart (NASDAQ:CRMT) may look like a very appealing stock on the surface. The company is in the growing used-car-retailing game and trades at a steep discount compared to peers such as CarMax. With fewer than 150 dealerships on the map, America's Car-Mart has plenty of opportunity to grow its footprint -- and it's working on it. In recent quarters, the company has grown revenues by double digits. But before you put the pedal down on this low-end-dealership play, make sure you know where the cash really comes from.

Earnings recap
The Arkansas-based Car-Mart brought in revenue of $121 million this past quarter, compared to $110 million in 2012. The 10% gain was driven largely by solid same-store-sales growth of 3.8%. Unit sales increased a little more than 8%, while the average sale price grew 2%. The bottom line, however, came up far short of Wall Street expectations as the company earned $0.61 per share. Analysts wanted $0.81 per share, sending the stock down nearly 7% in Wednesday's trading.

America's Car-Mart specializes in selling and financing older-model-year vehicles to serve buyers who may otherwise be unable to purchase a car. The company is largely based in the Southeastern United States and is steadily growing dealership count (three opened in the just-ended quarter). The stock trades at just over 10 times forward earnings and has an EV/EBITDA of 8.71 times. CarMax, for comparison, trades at nearly 20 times forward earnings with an EV/EBITDA of 19 times. In its most recent quarter, America's Car-Mart grew sales by 18% and net income by 26%.

While top-line sales grossly outweigh interest revenue, the margin on actual vehicle sales is quite slim, leaving the financing arm as the real moneymaker for America's Car-Mart. Financing is by no means an inherently bad business to be in, but this particular model raises questions and may be the reason that America's Car Mart has such a drastic valuation difference on the markets.

Bottom feeding
Given that the company sells to the bottom end of the car-buying market, its financing presents a heightened level of risk. Management acknowledges this, but just considers it to be a normal risk of doing business.

America's Car-Mart's provision for credit losses, a guesstimate for credit risk, is currently more than a quarter of its revenue. If we were to compare this to the mortgage business before the financial crisis, this would most certainly be in the junk category.

Low-end-financing businesses like this one have also been considered predatory by regulators in previous instances. America's Car-Mart does not seem to have any ongoing discussions with regulators, but it's far from immune. Companies like the rent-to-own Aaron's have drawn sharp criticism from both state and federal-level regulators, who are trying to force these businesses into improved interest-rate disclosure and stricter lending practices.

America's Car Mart is appealing in some ways, given valuation and dealership expansion, but the business relies too much on financing that looks risky at best. With a high rate of default, the company has to charge sky-high-interest rates -- a dangerous game when it comes to usury laws and consumer protection. I'd ignore the tempting metrics on this one, folks.