Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Aston Martin Lagonda Global Holdings Carry?
As you can see below, at the end of September 2021, Aston Martin Lagonda Global Holdings had UK£1.21b of debt, up from UK£1.08b a year ago. Click the image for more detail. However, it also had UK£495.2m in cash, and so its net debt is UK£711.4m.
A Look At Aston Martin Lagonda Global Holdings' Liabilities
According to the last reported balance sheet, Aston Martin Lagonda Global Holdings had liabilities of UK£878.4m due within 12 months, and liabilities of UK£1.27b due beyond 12 months. On the other hand, it had cash of UK£495.2m and UK£143.9m worth of receivables due within a year. So it has liabilities totalling UK£1.51b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's UK£1.37b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Aston Martin Lagonda Global Holdings reported revenue of UK£1.1b, which is a gain of 75%, 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.
Even though Aston Martin Lagonda Global Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at UK£79m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through UK£171m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Aston Martin Lagonda Global Holdings has 2 warning signs we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.