During the past couple of years, a lot of wealthy people have been splurging on expensive cars. In fact 2021 saw Lamborghini set a new sales record. British carmaker Aston Martin (LSE: AML) has also seen growing unit sales. Does that mean I should consider adding Aston Martin shares to my portfolio?
Sales grow but losses remain
Expensive cars have apparently sold well as rich people bored in lockdowns have been keenly anticipating their future need for speed. Aston Martin has been trying to grow its sales aggressively. Last year’s wholesale volumes grew 82% compared to the year before. The sell through from wholesalers to retail customers was also strong.
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But revved up sales do not necessarily translate to profits when one looks under the bonnet. In the first nine months of 2021, the company reported an operating loss of £68m. On top of that, the company’s indebtedness means it faces additional extra costs, such as for interest payments. So over the nine-month period, Aston Martin’s loss before tax was £189m.
The company also warned this month that slower than planned shipments of its Valkyrie model means adjusted EBITDA for 2021 is now expected to be around £15m lower than previously hoped. It emphasised that this was a change in timing only, as the cars are still expected to be delivered in future.
While the losses remain large, I do feel Aston Martin is making strong progress.
The sales performance is very impressive. Tight cost controls and business discipline could help the company return to profit in future, despite its current losses. The company’s cash flows also show signs of improving. In the third quarter, it reported free cash inflow of £5m. For the nine months, free cash flow remained negative as £39m left the business. But that was a vast improvement on the same period the prior year when the company saw more than half a billion pounds in free cash outflow.
However, improving prospects for a business do not necessarily make a company’s shares attractive to me. For example, if it has substantial debt, much of the benefit of any business improvement gets soaked up paying debtholders. So even in a business with an attractive profit at the operating level there may be limited or no funds to reward shareholders, for example with dividends.
My take on Aston Martin shares
Over the past year the Aston Martin share price has lost 23%, at the time of writing this article earlier today. The shares have lost a staggering 88% of their value since the company’s flotation in 2018.
To boost liquidity, the company has previously had highly dilutive rights issues. There is a risk that could happen again. Net debt stood at £809m at the end of September. While that is an improvement compared to the year before, it is still a significant debt. Much of it is at a high interest rate. There is a risk that losses could again stretch the company’s liquidity in future.
So while I think positive news on the company’s sales progress and profitability could help support a higher Aston Martin share price, I remain wary of the risks. I have no plans to add the shares to my portfolio.