Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Aston Martin Lagonda Global Holdings plc (LON:AML) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Aston Martin Lagonda Global Holdings Carry?
As you can see below, at the end of March 2021, Aston Martin Lagonda Global Holdings had UK£1.19b of debt, up from UK£1.03b a year ago. Click the image for more detail. However, it also had UK£575.4m in cash, and so its net debt is UK£613.4m.
How Healthy Is Aston Martin Lagonda Global Holdings’ Balance Sheet?
We can see from the most recent balance sheet that Aston Martin Lagonda Global Holdings had liabilities of UK£855.7m falling due within a year, and liabilities of UK£1.25b due beyond that. Offsetting these obligations, it had cash of UK£575.4m as well as receivables valued at UK£154.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.37b.
This is a mountain of leverage relative to its market capitalization of UK£2.17b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Aston Martin Lagonda Global Holdings’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Aston Martin Lagonda Global Holdings made a loss at the EBIT level, and saw its revenue drop to UK£747m, which is a fall of 15%. We would much prefer see growth.
Not only did Aston Martin Lagonda Global Holdings’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at UK£173m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through UK£346m of cash over the last year. So in short it’s a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 2 warning signs for Aston Martin Lagonda Global Holdings (1 is concerning!) that you should be aware of before investing here.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not…