The Aston Martin Lagonda (LSE: AML) share price has collapsed 94% during the past year. In recent days, it’s recovered back above £1 but a fresh slide could happen at any time.
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.
