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Warren Buffett advice: here’s how I’m applying it to the Aston Martin share price

Jonathan Smith
·3-min read
Aston Martin
Aston Martin

Warren Buffett is one of the most respected stock investors of several generations. His investments, held via Berkshire Hathaway, have led him to establish a net worth of almost $79bn. This has taken several decades to achieve, but with all the wisdom the 90-year-old has, we can learn a lot from him. Over the years Warren Buffett has given various interviews in which he gives snippets of advice. It’s some of these I want to focus on in helping me to make up my mind on whether the Aston Martin (LSE:AML) share price is good value for me.

Understand what you’re buying

One piece of advice is to “never invest in a business you cannot understand”. Buffett is modest in this regard, which is why he steers clear of some technology firms as he simply doesn’t fully understand their inner workings. For Aston Martin, I’m comfortable in saying that I do understand the business. The vast majority of revenue comes from producing sports cars. Even though the brand has worked on special projects in recent years (such as its creative collaboration with Triton Submarines), its core selling point is the cars that bear its name.

I also understand why the Aston Martin share price has fallen so much this year. The stock is down 57%, and trades around 75p, a far cry from the IPO level only a few years back. The main reason for this move is simply the fact that the business is losing money. The loss before tax for 2019 was £104.3m, and in Q2 of this year, the business needed heavy cash injections. Lawrence Stroll led a cash raise of £536m, and even this wasn’t enough. So although I get Warren Buffett’s advice, I remain unsure whether to invest.

Warren Buffett on debt

Warren Buffett is not a fan of debt. He’s quoted as saying that “you can’t borrow money at 18 or 20 percent and come out ahead”. Even though interest rates are much lower now, the same principle applies with debt-laden firms. Sadly, this is the case for Aston Martin. As of Q3, net debt stood at £869m. To put this into perspective, Q3 revenue was £124m. The net debt is very high, and I think this is one of the key concerns as to why the Aston Martin share price will struggle to perform well and “come out ahead” anytime soon.

On balance, even though I understand what Aston does, I simply don’t think the business is currently performing well enough to warrant an investment. If it manages to reduce debt levels and turn a profit in the future, then this will change my opinion.

Opportunities elsewhere

Speaking of his team, Warren Buffett has offered a final piece of good advice when he said that “we have never forgone an attractive purchase because of the macro or political environment”. For me, just because I’m staying away from the Aston Martin share price doesn’t mean I won’t invest in something. Brexit and Covid-19 have meant many businesses are struggling. Yet there are good value cheap stocks I’m considering buying, one of which I wrote about here.

The post Warren Buffett advice: here’s how I’m applying it to the Aston Martin share price appeared first on The Motley Fool UK.

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jonathansmith1 has no position in any of the shares mentioned. 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