A company that focuses on cars with fast acceleration needs to know about deceleration too. Unfortunately for luxury car marque Aston Martin Lagonda (LSE: AML), a lot of deceleration has taken place in its share price. Since listing in 2018, Aston Martin shares have shed 98% of their value.
But is there some possible light at the end of the tunnel? There may be, and the company’s interim results released this week have me seeing more grounds for optimism on this score.
In fact, I think one specific factor could help propel Aston Martin shares higher if it comes to pass later this year.
Free cash flow and why it matters
That factor is a simple but important one known as free cash flow (FCF).
Some investors focus on profits. But they are an accounting concept and so, although profit and loss statements are useful, I do not look at them in isolation. For example, a company that bought expensive kit decades ago could still be writing down its value. That amount will be taken off its earnings accordingly – but it is not a cash cost.
By contrast, FCF is a reckoning of the cold, hard cash coming in (or going out) of a company’s coffers.
In the long run, I see cash as the lifeblood of a healthy company. If FCF is consistently negative, sooner or later a company will run out of funds unless it raises more. That brings a risk of diluting existing shareholders – something Aston Martin has already done many times.
A company’s accounts contain a cash flow statement. Typically it starts with operating cash flows (that is, those that relate to the business activity) and these are adjusted by financing and investing cash flows.
Potential good news at Aston Martin
So, for example, Aston Martin’s operating cash flows have typically seen money go out the door, but that has sometimes been counterbalanced by positive FCF thanks to share sales or borrowing. Over the long term, though, Aston Martin has been a cash pit – one reason its shares have been hammered.
The company’s interim results this week were poor, in my view. Revenues fell by a quarter year-on-year. Although the pre-tax loss was reduced, it still came in at £141m.
But one bright spot was the company’s reiteration of its goal to generate positive FCF in the second half of the year. It maintained its 2027-28 medium-term goal of “sustainably positive” FCF.
I won’t touch this
That would be a sharp contrast to the free cash outflow of £321m in the first half.
Although the company said it expected FCF generation in the fourth quarter to drive the bigger picture for the second half, frustratingly it did not get into many details of why it is upbeat about this.
If Aston Martin delivers on its goal, I reckon its share price could rally – perhaps dramatically.
Without hard evidence of a change in fortunes, though, I will not go near the share with a bargepole. The company has destroyed enormous shareholder value.
Although it has a strong brand and well-heeled customer base, it has yet to prove that it can turn them into a consistently cash-generating business.
