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We Think Aston Martin Lagonda Global Holdings (LON:AML) Can Easily Afford To Drive Business Growth

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·4 min read
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Aston Martin Lagonda Global Holdings (LON:AML) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Aston Martin Lagonda Global Holdings

When Might Aston Martin Lagonda Global Holdings Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2021, Aston Martin Lagonda Global Holdings had cash of UK£514m and no debt. Importantly, its cash burn was UK£36m over the trailing twelve months. That means it had a cash runway of very many years as of September 2021. Importantly, though, analysts think that Aston Martin Lagonda Global Holdings will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.


How Well Is Aston Martin Lagonda Global Holdings Growing?

Given our focus on Aston Martin Lagonda Global Holdings' cash burn, we're delighted to see that it reduced its cash burn by a nifty 90%. This reduction was no doubt supported by its strong revenue growth of 82% in the same period. Overall, we'd say its growth is rather impressive. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Aston Martin Lagonda Global Holdings To Raise More Cash For Growth?

We are certainly impressed with the progress Aston Martin Lagonda Global Holdings has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Aston Martin Lagonda Global Holdings has a market capitalisation of UK£2.0b and burnt through UK£36m last year, which is 1.8% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Aston Martin Lagonda Global Holdings' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Aston Martin Lagonda Global Holdings is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. One real positive is that analysts are forecasting that the company will reach breakeven. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Aston Martin Lagonda Global Holdings that investors should know when investing in the stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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