What’s a good price for Aston Martin shares?

Between the low in November and last week, the stock price Aston Martin (LSE: AML) three times. It was an incredible performance. But over the long term, Aston Martin stock has proven dangerous for many investors. They have lost 94% of their value since listing on the stock exchange less than five years ago.

Does the fall mean that the current price offers a cheap buying opportunity? Or is the stock overpriced after a recent strong performance?

Using earnings to Value Shares

One way many investors try to calculate stocks is by using the price-to-earnings (P/E) ratio.

With a stock Aston Martin, however, it is difficult. Now, the company is making losses. That means there is no reported earnings to use as the basis for calculating the P/E ratio.

How to use prospective future earnings? The company expects to achieve £500m of adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in 2024/25.

But there are some problems with using this number to value Aston Martin shares, in my view. This is an estimate and may not be the case.

Earnings per share depends not only on earnings but also on the number of shares in circulation. The car manufacturer has repeatedly and massively diluted existing shareholders by issuing new equity. It can be done again.

Also, I’m not comfortable with adjustments and exclusions. Why not include interest (as an EBITDA based approach) when valuing a company? After all, Aston Martin expects to pay £120m in cash interest costs this year. That is substantial.

The last concern I have about using the P/E ratio as a stand-alone evaluation tool is that a company can have solid earnings (which Aston Martin doesn’t) but high debt (which it does). The £766m of net debt on the company’s balance sheet will have to be repaid at some point. That will eat into profits and in my view reduce the value of the company as a whole, even if it starts generating income.

An alternative way to value Aston Martin stock

But if not the P / E ratio, how can I decide what is a good price for shares when considering what to add to my portfolio?

One approach could be using the price-to-sales ratio.

But I saw that it was pointless. Automakers like Aston Martin can increase sales if they choose. Indeed, the annual wholesale volume target is 10,000 units, an increase of 56% compared to last year. Luxury brands have pricing power that can boost selling prices without losing sales.

However, in my opinion, the increase in sales can reduce not increase the value of the company if it does not increase the profit.

Wait and see

In fact, I don’t think there’s any way to trust Aston Martin’s stock price right now.

The company remains very loss-making. He owes a lot. Sales are growing but whether they can meet management’s aggressive targets remains to be seen.

The company has destroyed a large amount of shareholder value since listing. I think it’s too early to say with any certainty that it’s turned a corner and it’s worth it now, let alone higher. So I won’t buy it.