So does it make sense for me to buy into the company now? Or could these already battered shares sink even lower?

Valuing the shares

I think the answer is that the shares could yet sink lower. In part, that is simply the application of a general principle, which is that shares can always get cheaper. Just because a company’s shares have fallen a long way does not mean that they cannot fall even further.

But I also see reasons to be bearish about Aston Martin shares specifically. The company has a large debt pile. It ended the first half with £1.3bn in net debt, a jump of almost half a billion pounds from the same point last year.

Total wholesale volumes in the first half fell 8% compared to the same period last year, even though Aston Martin has an aggressive plan to increase sales in the next several years. Its pre-tax loss also soared in the first half compared to the same period last year, coming in at £285m.

None of that sounds good to me. The company is burning cash and normally that means one of two things. Either the business needs to fix its economics – which could help boost the share price – or at some point it will need to raise yet more cash. That could dilute existing shareholders and push Aston Martin shares even lower.

Outlook remains unclear

So which of those scenarios is most likely? I think the answer is unclear. From a bullish perspective, Aston Martin has expanded its range of models and invested heavily in marketing over the past couple of years. At the interim stage, the company said it remains on track to achieve its medium-term targets.

Those include around 10,000 wholesales and approximately £500m of adjusted earnings before interest, tax, depreciation and amortisation by 2024/25. If the luxury carmaker can deliver on those targets, that could boost its shares.

Bear case

However, I am concerned that Aston Martin shares might sink still lower. Given the sluggish revenue growth seen in the first half, I wonder whether the company’s ambitious short-term sales targets are realistic.

I also continue to be concerned by the debt pile. Interest is a real expense Aston Martin needs to fund, not just an accounting line item. The company forecasts the cash cost of interest payments this year alone will add up to £130m. The debt will continue to act as a drag on profitability which, again, could hurt the share price.

I’m not buying Aston Martin shares

With an unclear outlook and lack of a business model that is proven to be profitable, I think Aston Martin shares could get even cheaper than they are now.

The risks are too high for my taste and I have no plans to invest.

Its plunge into penny stock territory this October prompted some light dip-buying. But I’m not prepared to invest a single penny into the luxury car maker.

Here are three reasons I’m avoiding Aston Martin shares like the plague.

1. Balance sheet woe

As a UK share investor my main concern is over the motor manufacturer’s weak balance sheet.

Aston Martin gave itself a lifeline last month. It raised £654m when Chinese automaker Geely and the Saudi Arabian sovereign wealth fund invested in the company.

However, Aston still has a mountain of debt that it needs to eradicate. It had £1.3bn worth at the midpoint of 2022. It could still struggle to get its growth plans off the ground like developing new models and electrifying its range.

2. The sinking economy

Aston Martin’s colossal debts would be a worry at the best of times. They could endanger the company’s growth plans and, potentially, its ability to eventually pay dividends.

The company’s weak balance sheet is particularly concerning today given the state of the global economy. As people start to rein in spending, demand for its high-value products could sink. At the same time, runaway inflation threatens to make losses much higher than City forecasters currently expect.

Aston’s ability to pay down these debts might become a massive problem.

3. A competitive industry

There’s no doubting that Aston Martin has one of the strongest brands out there. Being James Bond’s favourite carmaker, too gives it an appeal that few others can match.

Brand strength is one of the reasons why its sports cars remain in high demand today. It reported in late July that its GT and sports cars are “sold out until 2023.” It added that sales of its DBX sports utility vehicle (or SUV) were up a whopping 40% year on year during the first half of 2022.

The problem, however, is that the firm operates in a highly competitive market. And it’s not the only world-class aspirational brand that affluent car buyers have to choose from.

Rolls-Royce and Bentley are two other formidable and fashionable British brands. Also vying for customers are Lamborghini, Mercedes-Benz, Ferrari, and Porsche, just to name a handful of others. And worryingly they are already making big strides in the field of electric cars, a critical growth area for Aston.

Too much risk

Aston Martin has terrific growth opportunities as the number of ultra-wealthy individuals grows. Sales of luxury and high-end sports cars is tipped to balloon over the next decade, and especially in regions like China where the company is already heavily focused.

But as an investor I’m required to balance the potential rewards I could enjoy with the risks. And in this case the dangers of parking my cash here are colossal. I’m far happier investing in other UK shares today.

Trying to find good value

The main reason why I’d buy the stock is as a value play. This style of investing focuses on buying when the share price is below the long-term fair value. A stock might drop below this level based on investor fear, or because people think there’s little value left in the company.

I don’t share this view and think that Aston Martin is well positioned for the future. The half-year results revealed several encouraging signs. For example, the average sales price of £164k in H1 2022 was up 9% from £150k in H1 2021. Revenue also climbed by 9%. Fundamentally, this shows that there’s demand for the cars being produced. In fact, it noted that “retail customer demand continued to run ahead of wholesales in H1 2022”.

Even the loss looked more damaging than it actually was. Of the £285m loss, a massive £134m was down to a revaluation from the falling exchange rate. Of course, it’s still a negative, but it’s important to note that this is a non-cash impact.

All of the above leads me to conclude that the business does have good value in its current operations.

Aston Martin shares tell a different story

There’s a large disconnect between my interpretation of the business and the performance in the share price. It’s down 85% in the past year, with 47.3% of that coming in just the past three months.

Sure, the supply chain issues in the automotive industry are a clear negative. It also doesn’t help that Aston Martin is posting losses when other manufacturers are still profitable. In an uncertain market with a gloomy economic backdrop, I get why new investors would want to park money in a profitable car company instead of this one.

What I think it boils down to is whether the share price is oversold on the basis of broader stock market fear, rather than business-specific issues. I think that this is indeed the case at the moment.

However, it can take months or years for a value stock to move back higher. As a long-term investor, this doesn’t bother me too much when the share price fall has been fairly modest. But when I’ve seen the share price halve in just the past three months, it does worry me.

The last thing I want to do is buy now and see the share price drop another 50% in a few months. This would mean I’d need the stock to double in value just to break even. On that basis, I still can’t convince myself to buy right now.

I’m also conscious of Warren Buffett’s advice, though. According to the Oracle of Omaha, any business can be a bad investment at a high price, but not every business can be a good investment at a low price.

With that in mind, here’s one FTSE 100 stock down 36% that I’m looking to buy for my portfolio and one FTSE 250 stock down 82% that I’m avoiding at all costs.

Halma

I think that Halma is one of the best stocks in the FTSE 100. The company is consistently profitable and has a strong balance sheet.

Over the last 12 months, Halma generated £279m in operating income. And with only £194m of tangible assets to maintain, around 71% of that operating income became free cash.

The company also has its debt well under control. Interest payments on Halma’s debt account for around 3% of its operating income.

Net income has grown at around 13% per year over the last few years, which is good but not great. That means that there’s a risk that Halma’s best days might be behind it.

I wouldn’t count this one out yet, though. One way that Halma grows is by buying other businesses, and with interest rates rising, I think that it should get some opportunities to do this at attractive prices.

With the stock down 36% since the beginning of the year, I think that shares are a bargain right now. The share price is currently £19.59 and I’m expecting to buy more shares in the near future for my own portfolio.

Aston Martin Lagonda

Shares in Aston Martin Lagonda (LSE:AML) have fallen by 82% since the beginning of the year. But I still don’t think that it’s a bargain.

Halma is a consistently profitable business with a strong balance sheet. Aston Martin is neither of those things.

The company is currently unprofitable and funded by a combination of debt and equity. To me, this looks like a big problem.

Since 2018, the amount of debt has increased from £704m to £1.4bn. As a result, where Halma spends 3% of its operating income on interest payments, this accounts for around 15% of Aston Martin’s revenue.

When it’s not raising money by taking on debt, Aston Martin raises money by issuing shares. The number of shares outstanding has gone from 85m to 311m over the last four years.

That’s an increase of 265%. In other words, if I owned 10% of Aston Martin at the end of 2018, my ownership stake would have decreased to around 2.7%.

Aston Martin did turn a profit in 2017, so it can be done. But I don’t see how it can become a viable investment proposition, so I’m staying well away from this stock.

Aston Martin’s time on the London Stock Exchange has been a disaster since Day One. But could now be a good time to buy in?

Here are four important things potential investors need to think about today.

1. Exceptional brand power

Aston Martin has one of the best names in the business. It’s the embodiment of both speed and luxury. It also helps to be superspy James Bond’s favourite carmaker (barring a short period during the 1990s when BMW took over).

The automaker has spent more than 109 years building its formidable reputation. And, more recently, its sought to reinforce its sporting pedigree through entry into the Formula 1 racing series.

Aston Martin’s half-year report revealed “strong demand across product lines” and that its GT and Sports cars were sold out until 2023. Its badge remains as popular as ever.

2. Near-term sales stress

The problem for Aston Martin is that near-term revenues look extremely shaky, regardless of its brand appeal.

Supply chain and logistics problems mean it’s struggling to meet orders. This is a problem that’s set to persist too amid, for example, troubled production of semiconductors in Asia.

Aston Martin’s sales might also suffer as the global economy teeters towards recession. Sales of big-ticket items like luxury automobiles are particularly vulnerable during tough times.

3. Fast-growing markets

Having said that, the long-term outlook for the business remains exciting. Analysts at McKinsey & Company believe that the luxury car market will grow strongly between now and 2031. They think demand for vehicles largely in Aston Martin’s price point will expand at a compound annual growth rate of 9-10%.

I’m especially encouraged by Aston’s attempts to grab the Chinese market. Sales in the company’s fastest-growing territory rocketed 206% in 2021.

The launch of the firm’s DBX Straight-Six model last November — which is only sold in China — illustrates the determination it has to build its brand there.

4. Debt questions

Aston Martin’s balance sheet is the main thing influencing whether I should buy the automaker’s shares. And sadly the company’s liquidity gives me the shivers.

The company recently raised £654m in capital after Saudi Arabia’s sovereign wealth fund and Chinese carmaker Geely jumped on board. However, Aston continues to carry a mountain of debt (net debt stood at £1.3bn as of June).

Unfortunately, the cost of getting its new models from designer drawing board to the road will cost a small fortune. There is also the question of how Aston Martin will deal with its debt problem if sales do indeed slump in the near term. The possibility of it tapping its shareholders for cash is one possibility.

I love Aston Martin’s products. But, as an investor, I’m happy to steer clear of the under-pressure carmaker.

The luxury carmaker continues to plunge as jitters over the company’s future persist. Increasing fear over the global economy — and what this could mean for the expensive sports car market — isn’t doing battered Aston Martin any favours either.

The company’s share price has lost around nine-tenths of its value since the start of 2022. As a long-term investor, should I pile into it as a speculative buy?

Chinese money

First, let’s remind ourselves of that enormous capital boost from China. It makes sense as worries over its balance sheet have weighed on Aston Martin’s share price.

On Friday it was announced that Geely had taken a 7.6% stake in James Bond’s favourite carmaker. It’s a move that followed similar pile-ins by Mercedes Benz and Saudi Arabia’s sovereign wealth fund.

Aston has now raised a hefty £654m following Geely’s decision.

3 big boosts for investors

Geely’s intervention doesn’t only provide the UK share with much-needed liquidity (Aston Martin’s debts stood at a gigantic £1.27bn as of June). The Chinese company also owns various other well-known carmakers.

So it could furnish the British marque with important expertise in the field of product development. In particular, its pedigree in green motoring through its Volvo and all-electric Polestar lines could boost Aston’s chances in the low carbon era.

The Warwickshire company plans to purely sell electric-only and hybrid models by the end of the decade.

What’s more, Geely’s involvement could help Aston to turbocharge its sales in the Chinese marketplace. Strong long-term growth in personal wealth makes the country a major prize for big carmakers.

The company’s latest figures show it sold a record 1,815 vehicles in China. This represented 30% of total wholesale volumes.

Should I buy Aston Martin shares?

This could all boost Aston Martin’s share price in the longer term. So why has the company continued to fall in value?

For one, Aston still has a major liquidity problem despite Geely’s cash injection. It still has a huge net debt that requires sky-high sums to service. It also needs lots of money to continue getting its vehicle development programmes off the ground.

The situation isn’t helped by supply-side problems that are pushing up costs and hitting deliveries of its motors. Trading threatens to get a lot more difficult as the global economy slumps too. It’s a scenario in which luxury carmakers could see orders dry up.

In this landscape, the chances of the business placing more shares to raise cash at the expense of existing shareholders cannot be ruled out.

I’m a big fan of Aston Martin and its products. But from an investment perspective it’s proven to be a car crash. It’s fallen around 98% in value since its London Stock Exchange IPO in 2019. And in my opinion it’s at risk of falling even further. I won’t touch it with a bargepole.

Growing trade interest

But that has not scared away all potential investors. In fact, some of them have been piling into the company in a big way.

Aston Martin announced a capital raise of £654m last month. Investors include Saudi Arabia’s sovereign wealth fund, which now holds an 18.7% stake in the carmaker, and Mercedes Benz. Shareholders also now include Chinese auto firm Geely. It announced a 7.6% stake in Aston Martin last week.

Considering my move

So, very deep-pocketed and sophisticated investors are investing tens of millions of pounds while the Aston Martin share price is in pennies. Should I do the same?

I do not think so. The reason highlights an important distinction when it comes to small private shareholders as compared to other types of investor.

Strategic versus financial investing

Mercedes and Geely are what we call trade buyers.

They may well have a strategic interest in owning part or all of Aston Martin, to improve their own competitive position. In the Summer, Aston Martin talked about enjoying “a long-term strategic relationship with Mercedes Benz, evidenced by their further investment in the company and our planned deployment of their technologies”.

Geely has been sniffing around Aston Martin for years. It previously offered to inject over £1bn into the company. The Chinese firm manufactures London taxis and owns a majority stake in UK luxury carmaker Lotus.

Both firms may see commercial benefits to increasing their ownership stake in Aston Martin or trying to take it over altogether. For such a strategic buyer, financial considerations can be a low priority. They may not mind what happens to the Aston Martin share price after their purchase, because their aim is a strategic not financial benefit.

Risks and opportunities

I do not see the same rationale for the Saudi stake, though.

A big chunk of Aston Martin may be a trophy asset. But is that enough to justify investing in a business that continues to haemorrhage money? The iconic brand and expanding range of models could make Aston Martin an attractive investment over the long term. But I see sizeable risks, such as further shareholder dilution due to the company’s debt-heavy balance sheet.

Still, maybe the Saudi fund is taking a purely financial approach and reckons the Aston Martin share price is a bargain. Perhaps they hope to benefit financially from unloading their stake at a profit to any future bidder.

The Aston Martin share price does not tempt me

However, the Saudi sovereign wealth fund is in a very different position to me as a private investor.

It has enormous funds at its disposal and a plethora of expert advisers. A stake of nearly 19% makes it a key shareholder, which could mean influencing strategy at board level.

None of that applies to me. I also lack the strategic interests of trade buyers like Geely. Aston Martin has been an out and out disaster so far for small private shareholders. I have no interest in joining their number.

Today, Aston Martin has a market-cap of just over £500m. And while that might not sound too small — after all, outside of Chelsea and Knightsbridge, they’re not common feature on world roads — the recent Porsche IPO has demonstrated how far Aston has fallen behind its peers.

Porsche shares actually climbed on their debut in Frankfurt despite the fairly negative investment climate. The German stock now has a market-cap of €75bn. The gap between the two firms is unbelievable and, arguably, more broadly demonstrates the decline of British manufacturing.

This is hard to believe

So if I had invested in Aston Martin shares three years ago, today I’d be very unhappy. In fact, over the 36 months, Aston Martin stock has fallen a staggering 96.7%. As a result, if I had invested £1,000 three years ago, today I’d be left with just £33. That is a phenomenal loss.

The share price has been hit by several issues. The pandemic, of course, was not good for sales and particularly in high-growth markets such as China, where economic growth is also slowing.

The iconic brand has failed to deliver the growth that chief executive Lawrence Stroll had hoped for. The company has registered loss after loss and net debt continues to grow. The company reported a pre-tax loss of £285.4m in the six months to June 30, compared with a loss of £90.7m a year ago.

In September, the firm launched a £575.8m rights issue as part of an effort to pay down debt and support future growth.

A diamond in the rough?

Debt and slow growth are the big challenges here. The company has a £1bn debt burden costing around £130m a year in interest payments.

And that put a lot of pressure on the company to sell more just to cover interest repayments. However, Aston only sold 2,676 vehicles in the first half of 2022, so it’s a long way behind Stroll’s lofty plans for 10,000 sales per year.

Aston had pinned its hopes on the Chinese market, but the country has experienced lockdowns and slowing economic growth this year. Moreover, there have been been supply chain issues that have further complicated its growth objectives.

Aston does not expect to be in positive cash flow until at least 2024. And that’s going to require a pretty serious turnaround.

However, there are several reasons to be optimistic. The most recent raise should help bring debt levels down. And, assuming supply chain issues can be dealt with, I’m confident there is more than enough demand for 10,000 new Aston Martins a year — I genuinely don’t think another supercar company comes close on elegance. Moreover, I see huge potential in the DBX range.

With a new former Ferarri boss onboard, I expect the firm to improve its margins and really enter the 21st century with non-petrol offerings. Investing in Aston is clearly risky, but with the share price so heavily discounted, I’d be happy to take a chance.

Could that change in future?

The economics of the business

Any business has what is known as a top line and a bottom line. That terminology refers to places in the company accounts. The top line basically shows a firm’s annual revenues. The bottom line is calculated by deducting a variety of costs from that top line, so it shows a profit or loss.

A business like Aston Martin ought to have a beefy top line. After all, its products are expensive and it sells a decent number of them. Last year, the firm’s revenues were around £1.1bn. That was 79% higher than the year before, reflecting a big jump in the number of cars sold.

But what about the bottom line? It showed a £214m loss. That was 54% smaller than the prior year, but still a significant loss. Despite booming sales, Aston Martin was unable to turn a profit.

Balance sheet woes

The reason for that is clear, looking at the items between the top and bottom lines on Aston Martin’s annual accounts. Even at the operating level, the business was lossmaking. But that loss — £77m — was under a quarter of what it had been the year before.

At around £137m, the gap between the operating loss and total loss was substantial. That is due to non-operating costs. These include items like financing charges, such as interest payments.

In the case of Aston Martin, those costs are large. In recent years it has borrowed heavily. The carmaker ended the first half of this year with almost £1.3bn of net debt on its balance sheet. Servicing such borrowings can be expensive. Indeed, it means that even if the firm was to turn a profit at the operating level, it might not actually generate money to pay out to shareholders in the form of a dividend. That is because non-operating costs continue to hurt its bottom line.

I’m not expecting an Aston Martin dividend soon

The company has taken steps to reduce that debt, for example by issuing new shares this month. That helped it raise more funds.

The company has said it expects to become cash flow positive in 2024. It also expects to increase revenue to £2bn by 2024-25. If it can achieve those ambitious targets, the firm may start generating spare funds. An improving financial performance could enable an Aston Martin dividend to be paid.

However, there is no guarantee that will happen. The company has so far been a cash pit for shareholders. Its share price has slumped 80% in the past year alone.

A lot of things have to go right before an Aston Martin dividend could be paid. I see real risks that business performance will not be strong enough for that to happen in the next several years. I have no plans to buy the shares for my portfolio.

Share price movement and rights issue

It’s not difficult to observe that the share price performance of this luxury car manufacturer has been poor recently. Over the last year, the shares plummeted 80% and currently trade at 142p.

What’s the reason for this? Well, some of the share price movement has been caused by a recent rights issue. The rights issue gave existing shareholders the right to buy four shares for every one they held. 

This was at a price of 103p per share, a 79% discount from their price at the beginning of September. This would mean dilution for any shareholder who didn’t take up the right to buy the additional shares.

The rights issue aimed at raising £575.8m to bolster Aston Martin’s balance sheet. It’s easy to see why this was necessary. It currently has a debt pile of £1.21bn and a cash balance of just £135.81m. 

In a challenging economic environment, the company felt it necessary to go to shareholders for additional support. Up to now, the market has interpreted this move negatively. 

Recent challenges and results

For the past few years, the business has faced a variety of issues. These include supply chain problems, the war in Ukraine, and an uncertain economic outlook. 

All of these are continuing to impact both production and sales and, as a result, are weighing heavily on financial results. 

For the six months to 30 June, for instance, the firm reported pre-tax losses of £285m. This widened from just over £90m during the same period in 2021. 

What’s more, the number of cars sold came in at 2,676. This was also down compared to last year, when sales stood at 2,901.

These recent results hardly instil confidence in me, as a potential shareholder.

Despite all the doom and gloom, the company does expect an 8% increase in core volumes for the whole of 2022. Furthermore, it forecasts a 50% improvement in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA). 

Although these expectations could signal a turnaround in Aston Martin’s fortunes, they’re only forecasts. It remains to be seen if the company can achieve these targets.

The bottom line

Overall, I’m alarmed by the recent share price movement. What’s more concerning, though, is the scale of the rights issue and the debt pile this is aimed at reducing. Given the relatively small amount of cash, I’m worried that short-term issues, like supply chain problems, may inflict significant damage on the business.

To that end, I won’t be going anywhere near the shares.