Aston Martin Lagonda Global Holdings (LON:AML) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Aston Martin Lagonda Global Holdings plc (LON:AML) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Aston Martin Lagonda Global Holdings

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

The image below, which you can click on for greater detail, shows that at December 2020 Aston Martin Lagonda Global Holdings had debt of UK£1.08b, up from UK£953.9m in one year. However, it also had UK£504.0m in cash, and so its net debt is UK£580.8m.

How Healthy Is Aston Martin Lagonda Global Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aston Martin Lagonda Global Holdings had liabilities of UK£808.3m due within 12 months and liabilities of UK£1.18b due beyond that. Offsetting these obligations, it had cash of UK£504.0m as well as receivables valued at UK£154.5m due within 12 months. So it has liabilities totalling UK£1.33b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Aston Martin Lagonda Global Holdings has a market capitalization of UK£2.32b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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 made a loss at the EBIT level, and saw its revenue drop to UK£612m, which is a fall of 38%. To be frank that doesn't bode well.

Caveat Emptor

While Aston Martin Lagonda Global Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost UK£226m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through UK£459m 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Aston Martin Lagonda Global Holdings (1 is a bit concerning!) that you should be aware of before investing here.

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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