Aston Martin Lagonda Global Holdings (LON:AML) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Aston Martin Lagonda Global Holdings plc (LON:AML) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aston Martin Lagonda Global Holdings

What Is Aston Martin Lagonda Global Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Aston Martin Lagonda Global Holdings had UK£1.18b of debt in September 2023, down from UK£1.51b, one year before. On the flip side, it has UK£543.8m in cash leading to net debt of about UK£633.6m.

How Strong 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£1.00b falling due within a year, and liabilities of UK£1.27b due beyond that. On the other hand, it had cash of UK£543.8m and UK£224.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.51b.

This is a mountain of leverage relative to its market capitalization of UK£1.51b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Aston Martin Lagonda Global Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Aston Martin Lagonda Global Holdings reported revenue of UK£1.6b, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Aston Martin Lagonda Global Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost UK£116m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£348m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Aston Martin Lagonda Global Holdings you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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 factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.