At the current share price of $4.07 per share, Automotive Holdings Group Ltd (ASX: AHG) sports a fully franked dividend yield of 5.5% or 7.9% grossed up.

When term deposits are lucky to pay 3% maximum, a near 5% additional income is very attractive.

The good news is that that yield is based on the dividend of 22.5 cents paid in the 2016 financial year (FY16).

And it wasn’t a great year for the automotive retailer and logistics group…

  • Total group revenues were up 7% in FY16, compared to 11% in FY15
  • Refrigerated logistics saw revenues sink 5% and earnings before interest, tax, depreciation and amortisation (EBITDA) 18%. The division contributed just $8.2m in profit before tax.
  • Other logistics – which includes KTM motorcycles, AMCAP parts, and GTB truck bodies/VSE solutions saw revenues fall 12%, but that was mainly due to the divestment of Covs. It’s only a small division – contributing just $5.7 million in profit before tax – but its margins are also small.
  • Earnings per share growth has fallen consistently over the past four years – which is now a concern.
  • Net debt (excluding vendor finance) rose another 19% to $274 million in FY16, after almost doubling in FY15. It’s a concern that the car retailer had such a poor year despite a massive increase in debt.
  • Net debt is now 38% of total equity – double what it was in 2013.
  • The growth in debt is masking a deterioration in returns on equity. Return on invested capital (ROIC) fell below 10% in FY16, thanks to growing debt levels and equity issued to shareholders. ROE was 13.7% in FY16, down from 13.9% in FY15.
  • Over the past five years, Automotive Holdings has generated an additional $44.8 million of net profit but has needed another $267 million worth of assets to do so.
  • Another $110 million capital raising in August to make more acquisitions will further dilute shareholders – although some of that will go towards paying off recent acquisitions and cutting net debt.

Foolish takeaway

At the current price, the company is trading on a P/E of ~12.8x, which appears fair value for a company with some issues that need watching (mainly net debt and ROE). However, should the company manage to sort out its logistics division, earnings growth could jump, making today’s share price cheap.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.