Is Aston Martin Lagonda Global Holdings (LON:AML) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Aston Martin Lagonda Global Holdings

How Much Debt Does Aston Martin Lagonda Global Holdings Carry?

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. However, it does have UK£543.8m in cash offsetting this, leading to net debt of about UK£633.6m.

A Look At Aston Martin Lagonda Global Holdings' Liabilities

The latest balance sheet data shows that Aston Martin Lagonda Global Holdings had liabilities of UK£1.00b due within a year, and liabilities of UK£1.27b falling due after that. Offsetting these obligations, it had cash of UK£543.8m as well as receivables valued at UK£224.1m due within 12 months. So its liabilities total UK£1.51b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of UK£1.75b, so it does suggest shareholders should keep an eye on Aston Martin Lagonda Global Holdings' use of debt. 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 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.

In the last year Aston Martin Lagonda Global Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to UK£1.6b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Aston Martin Lagonda Global Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at UK£116m. 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. Another cause for caution is that is bled UK£348m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. 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.