Aston Martin Lagonda (LSE: AML) is famous for its luxury fast cars that star in James Bond films. In the past couple of years its share price has also been moving at high speed – in reverse. Having tumbled to 65p, it might look like a bargain for such a well-known name. Is it a share to buy now for me?
Looking under the bonnet, there are a couple of things which make me think that for me, Aston Martin might not be a bargain share to buy right now. Not only do these factors apply to Aston Martin, I find it useful to remember them when looking at any possible shares to buy now.
The company has been piling on debt
When deciding what shares to buy, I look at information like a company’s earnings and profitability. But it is also important to look at a company’s balance sheet. The balance sheet shows its assets and its liabilities. That matters because a company with surplus cash is often stronger than one whose income is used to service large debts.
Aston Martin Lagonda has been borrowing a lot lately. Last month, it issued an eye-watering £1.2 billion in new debt. It had to pay heavily to do that, with a payout of 10.5% interest on its newest bonds. Such a high interest rate suggests lenders are nervous about the company’s financial health.
Debt matters when assessing a share to buy now for me. Large debts give companies less leeway to pay dividends to shareholders. Even if Aston Martin Lagonda does make profits in years to come, they’ll need to service the large debt pile.
Aston Martin shareholders have been heavily diluted already
For a struggling company like Aston Martin Lagonda, another thing to watch is whether it is diluting existing shareholders. This is a common practice when a company needs to raise funds. One way to fund their needs is selling more shares. But that can mean that existing shareholders are diluted – in other words, their existing shares reflect a smaller percentage of the enlarged share capital. That can negatively affect the share price. When looking at a possible share to buy now, I always look at the dilution risk.
Aston Martin Lagonda floated in 2018, with 228 million shares on the market. But subsequent fundraising mean that there are now 1.8 billion shares in circulation. Shareholders have been heavily diluted already.
A new model launch adds to the unknowns
One reason people continue to invest in the carmaker is that it has recently launched its first sports utility vehicle, the DBX. A new factory built in Wales especially for the DBX is operating at full capacity. That sounds promising for Aston Martin Lagonda.
However, any major launch is a risk for a company. For example, demand may not have been forecast correctly or production kinks can take time to iron out. Aston Martin Lagonda’s finances already give it little room for error, so its heavy reliance on a brand-new model at this time just adds to the risk.
So despite its low share price, Aston Martin Lagonda is not a share to buy right now for me.
The post At 65p, are Aston Martin shares a bargain for me to buy right now? appeared first on The Motley Fool UK.
Christopher Ruane has no shares in Aston Martin Lagonda. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020