Why the Cash Converters International Ltd share price could be an opportunity

Cash Converters International Ltd (ASX:CCV) could give investors good returns.

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Economic cycles can play a huge part in how well a business does.

Australia's good times have led to banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) generating strong profits for shareholders.

However, businesses that typically do well in bad times haven't been so fortunate.

I think Cash Converters International Ltd (ASX: CCV) could be about to have a good turnaround over the next few years. Here's why I think it could be worth considering for a high-risk, high-reward buy:

Growing internationally

Cash Converters has more than 150 stores in Australia but its overseas expansion is particularly attractive.

It has 196 stores in the UK and 363 in 16 other countries. This gives management a huge scope to expand in whichever country offers the best opportunity.

Main markets could be about to turn

Cash Converters will typically do better in down times. Australia and the UK have done well since the GFC so the business has missed out.

However, the Australian economy looks as though it could be about to start heading backwards. Household mortgage debt ratios are at very high levels. Retail spending decreased slightly in the latest update. Interest rates are slowly rising again.

All of these factors (among others) could see a lot more people needing to sell items to Cash Converters, buy second hand goods or get a small loan.

The UK economy could also be about to go through a rough patch if the anti-Brexit side's economic points eventuate.

Share price is recovering

The market seems to have digested the worst of Cash Converters' news and now the share price is recovering, it has grown from $0.24 in May 2017 to today's $0.39.

Investors should never base an investment decision purely on price movements, but it can be an indicator that the price could keep going higher if the business keeps making the right moves.

Paid down debt

A key risk for any business is how much debt it has on its balance sheet.

Management made the smart move of cancelling the dividend and paying down debt in FY17. Net debt decreased by 56% to $26.7 million, which could be a clever move if the business needs to lend out more in the next couple of years.

The increase in free cash and reduction in borrowings reduced the gearing rate to 10.2% from 24.9%.

Valuation

Cash Converters is currently trading at 9x FY17's earnings. This is a cheap price/earnings ratio and if the business can grow earnings then it could be a good time to buy.

Foolish takeaway

Cash Converters isn't a safe or defensive business. Competitors could keep taking business from Cash Converters. Management could fail in the turnaround strategy. However, I think it warrants further investigation as a potential buy.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

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