Tesla Motors Financial Analysis
Tesla Motors Financial Analysis
In this paper I intend to provide a sound financial analysis of Tesla Motors Incorporated. I will do so by calculating and providing liquidity, profitability, and solvency ratios and then evaluating those results. Assessment of these ratios will more or less define Tesla Motors’ abilities to meet its short-term debts and obligations (liquidity), performance in relation to sales, assets, and profits or losses (profitability), and the resulting income amount, after tax deductions, against the company’s liabilities (solvency). Additionally I will compare Tesla Motors’ financial position against that of General Motors Company to better describe how the company is performing within its industry.
The Earth is in danger of rapidly overheating. Global warming is the widely accepted theory that states that the over production of air pollutants such as carbon dioxide will cause the Earth’s average temperature to rise annually until it reaches an irreversible threshold which will cause the planet to heat up so much it will become uninhabitable. Automobiles have been a major contributor to air pollution over the years. Gasoline fueled engines have churned out unimaginable amounts of gasses into the atmosphere adding to the problem. Until recently there have been no viable alternative vehicles to gasoline fueled cars. Even hybrid cars haven’t fully taken away the dependency for gasoline. Fully electric cars can reduce our dependency on fossil fuels, reduce greenhouse gas emissions, and hopefully reverse the damage done to Earth’s atmosphere. Tesla Motors is the electric car manufacturer paving the road to this greener world.
Tesla Motors is a United States car manufacturing company based in Palo Alto California. The company was founded by Martin Eberhard and Marc Tarpenning in July 2003. The historic electrical engineer and physicist, Nikoka Tesla, is the source of Tesla Motors’ company name and is very fitting. The alternating current motor used in the Tesla Roadster is actually derived from Nikola Tesla’s original 1882 design.
Tesla Motors is a publically traded company that produces fully electronic vehicles. Tesla Motors began to put itself on the map when it produced the Tesla Roadster – the first fully electric sports car. Following the Tesla Roadster was a fully electric luxury sedan called the Model S.
The Tesla Roadster was a huge success for the company. It was an all-electric sports car capable of traveling more than 200 miles on a single charge. It was extremely innovative and the first fully electronic automobile to use lithium-ion battery cells. The Roadster was featured on the cover of Time Magazine and received their “Best Inventions 2006 – Transportation Invention” award. The first one hundred Tesla Roadsters sold out in less than three weeks.
The Model S is the current standard Tesla vehicle in production today. The car was first announced in 2008 and hit the US retail market in June 2012. The Model S with its highest battery option could reach distances as far as 265 miles in a single charge. This car has been Tesla Motor’s highest achievement yet being the recipient of several awards including “Car of the Year” for both Motor Trend and World Green Car magazines in 2013 and also Time Magazine’s “Best 25 Inventions of the Year 2012” award.
Tesla Motors has plans to begin production on its newest car, the Model X, beginning in 2014. Ratio Analysis
Investors or creditors use liquidity ratios to help them determine if a company is a safe investment or how likely they are to repay a debt. Liquidity is a measure of a company’s ability when it comes to repaying continuing debts as they come due. For most liquidity ratios, analysts are looking for high numbers; the higher the value the better that company is at repaying short-term debts. The liquidity ratios I will elaborate on for Tesla Motors will be the current ratio, working capital, cash flow from operating activities to current liabilities, inventory turnover rate, and the days to sell the average inventory. The current ratio directly relates the company’s current assets against its current liabilities. A good current ratio will be over 1. For example if the current ratio were 2.0 this would mean that the company’s current assets are twice as large as its current liabilities. For Tesla Motors the current ratio drops significantly over the years. It starts at 2.76 in 2010, then drops to 1.95 in 2011, and finally reaches 0.97 in 2012. As you can see the current ratio in 2012 is below one. The current ratio of 0.97 means that as of December 2012, Tesla Motors has more current liabilities than current assets. The working capital also has a direct relationship with the company’s current assets and current liabilities. The working capital should be positive in order to be considered good. To determine the working capital the current liabilities are subtracted from the current assets.
As in the current ratio example the same pattern will show in the working capital. It will decline from 2010 to 2011 and then will become negative in 2012. This pattern shows a decline in Tesla Motors ability to use current resources to repay its debts. The ability for a company to pay currently maturing debts from periodic operations is determined by the cash flow from operations to current liabilities. To calculate this ratio you divide the cash flows from operating activities over the current liabilities. A good scenario would be to have a higher numerator (more cash flow from operating activities) than the denominator (current liabilities). This would indicate that the company could easily cover its current liabilities with its operating cash flow. Tesla Motors however does not have a higher numerator. In fact its operating activities cash flow shows a negative value for all three years – though one thing to consider is that the value has become less negative as the year 2012 approached. Both the inventory turnover rate and the days to sell the average inventory can tell investors how quickly inventory will sell on average. A high inventory turnover rate will indicate that a company is doing well in terms of selling its products and will not have excess inventory. The days to sell the average inventory will show, on average, how many days it will take to sell inventory after production. Tesla Motors fluctuates up and down within the years but eventually settles at an inventory turnover rate of 2.41 and 167.80 days to sell the average inventory. The inventory turnover rate of 2.41 may seem good but when compared to the industry average Tesla Motors is lacking.
Investors use profitability ratios to conclude how much return they can make on the company in question. These ratios show how well a company is doing based on how much profit they can produce. The profitability ratios will be a good reflection of a company’s overall performance in terms of efficiency and profits. The ratios used in evaluating Tesla Motors profitability are the gross profit rate, return on equity, net income as a percentage of sales, return on assets, and operating expense ratio.
The gross profit rate is a simple measure of how profitable a company’s products are. It is calculated by dividing the gross profit by the net sales. A good number for the gross profit rate would be a high positive number. Again Tesla Motors shows decreases as the gross profit rate falls from 26% in 2010 to just 7% in 2012.
To determine if the company does well using investors’ capital an analyst would refer to the return on equity. You would almost always want to see a positive number here if you were to invest your money into a company. In this case, Tesla Motors’ return on equity ratio becomes steadily more negative ending up at -2.27.
The net income as a percentage of net sales should be a large positive number to show that a company is doing well. Some companies show net loss rather than net income. In this case the company is not doing well and the ratio will reflect that as a negative percentage. For Tesla Motors the percentage is -96%. This number has become less negative than it had been in 2010 but is still not a good number.
The return on assets ratio is a way to measure the productivity of assets, without regard to how the assets are being financed. Since Tesla Motors has a negative operating income for all three years we know that the return on assets for those years will be negative since the ratio is calculated by dividing the operating income over the average total assets.
A good indicator of a company’s ability to manage their expenses is the operating expense ratio. For this ratio a lower result is optimal because that would mean that the operating expenses are low compared to the net sales. The trend for Tesla Motors indicates that the operating expense ratio is declining from 2010 to 2012 which would in itself be a good thing if the ratio wasn’t already so high. In fact the operating expenses are higher than the net sales for all three years. Solvency
Analysts looking for a good measurement of how likely it is that a company will continually be meeting its debts and credit obligations will turn to solvency ratios to find answers. High solvency ratios will usually indicate that a company has a better likelihood to repay its debts while lower solvency ratios will be deemed high risk are less likely to be unable to repay debts. The ratios I will explore for solvency are the debt ratio, interest coverage ratio, and the trend in net cash provided by operating activities. The debt ratio is calculated simply by dividing the company’s total liabilities over its total assets – therefore the result is the liabilities as a percentage of assets. This is useful for estimating long-term liquidity of a company. In this case lower percentages indicate a safer investment. Investors would like to see that a company’s debt is a small fraction of its resources.
Unfortunately Tesla Motors’ debt ratio increases over the years until it reaches a debt ratio of 0.89. This means that their total liabilities are 89% of their total assets. A company’s interest coverage ratio is a regularly used ratio used to determine creditors’ safety. It reflects the ratio of operating income that is available for the payment of interest to the annual interest expense. It is widely agreed that an interest coverage ratio above 2.0 is considered strong. In the case of Tesla Motors the interest coverage ratios are wildly negative – although they have improved from 2011 to 2012. The trend in net cash provided by operating activities dictates an entities ability to generate the cash needed in order to repay its debts and obligations. Tesla Motors’ trends in net cash provided by operating activities are negative which is not good. It shows a lack in the ability to generate cash for obligations and does not seem safe.
General Motors is an established car manufacturer and a competitor of Tesla Motors. The companies differ in product offering in that GM produces standard vehicles while Tesla produces electrical vehicles. General Motors is a large and well known manufacturer and represents a good portion of the industry.
Most analysts would tell you that as of 2012 General Motors has been in a better financial position than Tesla Motors. That seems to be true as far as the numbers reflect. For example I mentioned earlier that Tesla Motors’ current ratio was 0.97 meaning that as of December 2012, Tesla Motors has more current liabilities than current assets. The current ratio for GM equals out to be 1.30. This means that General Motors has more current assets than current liabilities.
Again Tesla Motors’ inventory turnover rate and days to sell the average inventory are 2.41 and 151.73 respectively for 2012. General Motors has much better numbers with an inventory turnover rate of 9.77 and 37.35 days to sell average inventory for the same year.
One interesting comparison between Tesla Motors and GM is the gross profit rate. As it turns out the Gross Profit rate is equal between the two companies for 2012 at 7%. This similarity shows that both companies have about the same ability to pay their overhead.
It is pretty clear that GM has Tesla beat in most areas right now. There are so many negative values in the Tesla calculations that I had to triple check my work to make sure I wasn’t making mistakes in the calculations. One of the most important things to note is that Tesla has been operating at a loss for each year while GM has consistently posted income.
Based entirely on the analysis provided in this paper I would not find Tesla Motors to be a worthwhile investment. The ratios and calculations of liquidity, profitability, and solvency do not reflect good results. Even results that are somewhat ‘ok’ are lacking when compared to competitors within the industry.
Interestingly the year 2013 looks to have been a great year for Tesla Motors. The March 31 2013 quarterly income statement is the first to show profits in years. The Tesla Motors stock price has skyrocketed from near $30 per share at the end of 2013 to near $200 a share current day. I think Tesla Motors continual operating losses and negative ratios can be attributed to research and development among other startup costs.
Tesla Motors has increased in fame and popularity all over the world and I would not be surprised if they did not own a large sector of the automobile industry in the future. With this knowledge I may have to reconsider whether I would invest in Tesla or not. One thing is for sure; electric vehicles are the future of cars and Tesla Motors is paving the way.
1. Financial & Managerial Accounting 16th Edition – Williams et al. 2. Yahoo Finance: Tesla Motors, Inc. (TSLA) – www.finance.yahoo.com 3. Tesla Motors Website – www.teslamotors.com