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This chart below is perhaps the clearest reason why I find Nicholas Financial (NASDAQ:NICK) such a compelling buy right now.

This shows the company’s pre-tax profit (in millions) along with the provision for credit losses. What you see is just how damaging the credit loss provisions have been.

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I think it’s interesting that when you combine the two, you can see that NICK’s business appears to be fairly stable. You can also see that the credit loss provisions are declining rapidly. If they get back to the level of 2006 then NICK will be much more profitable.

If the credit loss provisions were to run at the same rate today as they did in 2006, that would be an extra $2 million a quarter in pre-tax profits. Roughly speaking, that’s about 10 cents a share after taxes.

On top of that, there’s an acceleration effect. The better NICK’s business is now, the better it will be in the future. That’s because the more money going to the bottom line means that NICK will have more money to grow its portfolio.

A lot depends on how well the economy improves. If things keep going as they are now, then NICK should earn $1 a share this year, with the ability to earn as much as $1.20 a share. That’s not bad for a stock going for $7.50 a share.

Source: Nicholas Financial: Why It's a Compelling Buy