Image source: Aston Martin
I understand why Aston Martin (LSE: AML) shares — down 95% in five years and now selling for just pennies apiece — may grab many bargain-hunters’ eyes.
After all, with the high prices the luxury car marque can charge for its legendary vehicles, the company seems like it ought to have a license to print money.
But, of all the UK and US shares I own, Aston Martin is not one of them.
Not only that, but there are literally hundreds of shares in the London and New York market that I think have more attractive long-term prospects right now.
High debt load
For starters, there is the company’s net debt. Net debt is basically a company’s debt, balanced out against cash and cash-like assets.
Many companies have debt. In fact, for some of them it can be a way to accelerate growth, if their cost of capital is lower than the return they make on it, for example, by buying new machines and using them to improve their manufacturing capability.
But two things concern me about Aston Martin’s net debt.
One is its scale. It stands at £1.4bn.
That is a large amount for a company with a market capitalisation of £400m. It has also been growing, despite the company repeatedly diluting existing shareholders to raise new funds by selling more shares. And that is something I think could happen again in future if the business keeps burning through cash.
A second concern is the interest rate. On that £1.4bn net debt pile, the company expects to pay around £150m of net interest this year. That works out at over £17k of net interest per hour.
Why is the interest charge so high? Aston Martin’s lenders have been able to charge a high interest rate because the loss-making business needs the money and has limited options when it comes to finding a lender willing to take on the risk.
Myriad listed companies have a lower net debt relative to their market cap (or none at all) and less costly loan terms.
Unproven business model
But given how costly Aston Martin cars are, could it try to raise sales volumes and use its pricing power to get more money from its deep-pocketed customer base when selling them a car?
Yes, it could. Indeed, that is one of the attractive elements of the investment case. However, last year wholesale sales volumes fell by double-digit percentage terms, revenue slumped by more than a fifth, and the already large loss before tax grew by over a quarter.
Tariffs threw an unexpected spanner in the works. Perhaps this year will be better on that front. But then again, there are other risks such as weakening customer demand in an uncertainty economy.
Aston Martin has brilliant assets. However, since its current incarnation, listed in 2018, it has not been able to show it can consistently translate those brand and engineering assets into a profitable business.
Even without the net debt, I generally prefer to invest in businesses that have proven they can consistently make profits, not losses. With net interest costs of £17k per hour, the lack of a profitable business model becomes even more problematic.
Fortunately, the market is stuffed with shares benefitting both from proven business models and much healthier balance sheets than Aston Martin’s.
