Any knowledgeable investor knows that a company's profit is only an opinion, while cash is a fact. A peculiar contractual dispute involving Aston Martin highlighted this difference.
Ahead of its initial public offering last October, the UK automaker published a prospectus detailing its recent financial track record. The perennially money-losing company had achieved a small 20.8 million pound ($25.1 million) pretax profit for the first six months of 2018. Good news.
Yet that result benefited from 20 million pounds of unexpected income booked on the sale of intellectual property to a third-party automaker during the period. The unidentified buyer had approached Aston Martin about acquiring tooling and design drawings for the previous generation Vanquish sports car, as well as ongoing consultancy support.
With contracts inked, Aston Martin said it expected the cash to arrive in 5 million pound twice-yearly installments. In hindsight, it was not a good sign that the first of these payments was already overdue at the time the prospectus was published.
More than a year after the contract was agreed, Aston Martin has acknowledged that it may never recover the bulk of the money. A disappointing set of results published last month included a one-off 19 million pound provision for doubtful debt.
The identity of the recalcitrant counter-party had always been kept a secret, despite plenty of speculation in the automotive trade press about who would want the old Vanquish designs, and to what end. But during a call with analysts, Aston Martin's management inadvertently let the secret out. A China-based electric sports-car startup called Detroit Electric had sought the company's help in developing a vehicle chassis system, but then failed to make the required payments.
Detroit Electric is the brainchild of Albert Lam, a former director at the UK automaker Lotus. The headquarters of this aspiring Tesla are in Hong Kong, but its website boasts there's also a "state-of-the-art vehicle development and manufacturing base" in Leamington Spa, England, which is near Aston Martin's HQ.
Attempts to reach Detroit Electric for comment were unsuccessful. The latest available accounts of Detroit Electric's UK subsidiary show a loss and net liabilities for the 2017 financial year, while indicating that financial support from group companies remained available.
Aston Martin appears to be the disadvantaged party here, but its management credibility has taken another knock. The shares have collapsed by almost 75 percent since October as it's dawned on investors that the company might not be as resilient as it made out at the time of the listing.
A slowdown in sales volumes in its wholesale business has put a dent in any aspirations to take on Ferrari and to be valued like a luxury goods company rather than a straight automaker. It also makes the decision not to bolster the balance sheet with new money at the time of the listing seem reckless.
The automaker generates little cash but has almost 850 million pounds of net debt and lease liabilities. Thus 20 million pounds is a lot of money to simply go astray. It's flattering accounting in which the company capitalizes almost all of its development costs, instead of expensing them in its profit statement, can't paper over these flaws.
As with those r&d costs, Aston Martin was perfectly within its rights to book the income from Detroit Electric when it did. But it took a while to admit the contract was a bust. Next time a company tells you it’s had an unexpected windfall, be sure to check the money’s in the bank.