Is the beaten-down Aston Martin share price about to explode?

British sports car maker Aston Martin Lagonda (LSE: AML) must be one of the most disastrous stock market flotations of recent times. The Aston Martin share price has fallen by 90% since its flotation in late 2018.

However, I can see some signs of hope. Sales of key models such as the DBX SUV are said to be on target. Aston Martin’s revenue rose to £1,095m in 2021. That was 12% above 2019 levels and 79% higher than in pandemic-hit 2020. Is now the time to buy into this storied brand, ahead of a wider recovery?

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Targeting 50% sales growth

Aston Martin shipped more than 6,600 cars to its dealers last year. Executive chairman Lawrence Stroll hopes to increase this number to 10,000 cars per year by 2024/25. This could see sales double to £2bn a year.

Hitting this goal could lift Aston’s adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) from £138m in 2021 to £500m in 2024/25.

Stroll also says the company has started its “electrification journey” with the launch of a hybrid DBX in China. A plug-in hybrid is planned for 2024, with the first all-electric model due in 2025. By 2030, the company expects its sports, GT and SUV ranges to be fully electrified.

In the meantime, Aston Martin’s high-powered DBX707 SUV and updated V12 Vantage models are due to begin deliveries later this year.

What could go wrong?

These targets don’t sound unreasonable to me. But as a potential shareholder, I can see some risks. My big worry is that Aston Martin has far too much debt for my liking. In today’s 2021 results, the group reported net debt of £892m. That’s equivalent to leverage of 6.5 times EBITDA. My preferred limit is around 2.5x EBITDA.

The company’s loans aren’t cheap either. In 2021, Aston Martin’s paid out £117m in cash interest payments. This means almost all of the company’s adjusted EBITDA profit was swallowed up by interest payments.

My sums suggest Aston is paying an average interest rate of 13% on its debts. This tells me that lenders are nervous about the group’s high leverage and the risk of further problems with its loss-making operations. I’m nervous too.

Will the Aston Martin share price explode?

However, I’m encouraged by progress at Aston Martin. I think Stroll together with ex-AMG boss Tobias Moers are doing all the right things. Stroll’s 22% shareholding clearly gives him a strong incentive to stick with the business and complete a turnaround.

However, as an outside investor I’m not comfortable with the investment case for this UK share. Analysts don’t expect Aston Martin to report a profit until at least 2024. Meanwhile, the group’s debts and eye-watering interest payments are both expected to rise again in 2022.

For me, there’s too much financial risk here. A shortfall in sales or new product delays could trigger a cash crunch. Even if everything goes to plan, Aston Martin shares already look reasonably priced to me — not cheap.

I don’t think the Aston Martin share price is likely to explode any time soon, so I won’t be buying the stock.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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