In 2003, American inventor and entrepreneur Elon Musk formed Tesla Motors, a car company that sells electric cars and electric car components. Musk named it in honor of physicist and engineer Nikola Tesla, whose motor design found its way into one of Musk’s early cars. Tesla Motors is a public corporation based in Palo Alto, California and, as of year-end 2012, employs about 3,000 people, with an additional headquarters in Maidenhead, United Kingdom. As mentioned, Tesla Motors develops and produces electric cars, along with electric car components, their most famous products being the 2008 sports car, the Tesla Roadster, and the 2012 luxury sedan, the Tesla Model S, both of which are fully electric cars. With the Model S receiving some of the highest safety and customer satisfaction ratings in automobile history, Tesla Motors posted its first profits in company history in Quarter 1 of 2013. Those profits, however, came after a long struggle to find relevance in the American auto industry, which has always been resistant to change unlike its European counterparts. This struggle is evident in their financial statements from 2012, when Telsa posted a loss of nearly $400M.
Using Tesla’s income statement as a starting point, it is evident why they posted such a large loss. Tesla recorded total revenues of $413M, but had a cost of revenue of $383M, resulting in a relatively small gross profit percentage of 7.3%. Comparatively, Toyota and Honda had gross profit percentages of 15.4% and 25%, respectively. Tesla’s gross profit of about $30M was not nearly enough to cover its operating expenses. In the past 3 years, Tesla has been increasing the amount of expenses going into research and development. In 2012 alone, Tesla had $274M of research and development costs. That, in addition to its $150M in selling costs, resulted in the massive loss of $413M.
Tesla’s balance sheet is somewhat of a red flag, as well. To begin, Tesla has a current ratio of .97, which is alarming when considering that Tesla had $269M of inventory on hand at year end in 2012. Tesla has a decent cash balance of around $221M, but with no short-term investments and receivables of just $27M, Tesla does not have nearly enough highly liquid assets to cover its current liabilities of $539M. Tesla has an acid-test ratio of just .46, which tells investors that it does not have the ability to pay off its short-term liabilities without selling its inventory and, as shown by its current ratio, Tesla would not be able to completely cover its current liabilities even if it could convert its inventory into cash.
In a broader look at Tesla’s assets and liabilities, it is alarming to see how heavily Tesla is financed by debt. Tesla has a debt ratio of .89, meaning 89% of Tesla’s assets are leveraged by creditors and lenders. This should be a large red flag to investors, as companies leveraged by debt are typically riskier investments. For reference, Honda’s assets are financed 63% by debt and Toyota’s by 64%.
Moving down the balance sheet, to stockholders’ equity, it is more evident why Tesla has such alarmingly high debt ratios. Even though Tesla is a public company, its stock is listed on its balance sheet at only $115,000, as Tesla holds its stock at a par value of just $.0001 per share. Tesla’s retained earnings show the damages of years of net losses, sitting at a negative balance of $1066M. Its paid-in capital is the only reason that Tesla’s equity is at a positive mark, as it holds $1190M of additional capital. However, Tesla still winds up with an unimpressive $125M of stockholders’ equity.
Tesla’s bad news continues with its cash flows statement. Prior to 2012, Tesla had posted positive cash flows in 2010 and 2011. However, Tesla was not able to overcome its massive net loss to post positive cash flows in 2012. The biggest culprit in Tesla’s negative cash flows, besides its net loss, was its massive inventory that it was not able to match with sales. Excluding its inventory problems, Tesla would have posted a positive cash flow that would rival its 2011 cash flow of $155M. Instead, Tesla wound up with a negative 2012 cash flow of $53M.
Tesla Motors, however, has no reason to be too concerned about its history of financial statements. Having posted its first profits in 2013, it is a company that is on the rise. Its products consistently receive top safety reviews, and its customer satisfaction reviews are some of the best in history. Tesla is also led by an incredibly visionary in Elon Musk, who has learned how to deal with adversity after a long 10-year road to profitability. Tesla’s negative financials have never seemed to bother investors, either, as Tesla’s market value on stock has overall risen in the last several years, driven especially by Tesla’s Q1 2013 profit.
One interesting concept from BUS 332 to apply to Tesla is the depreciation and amortization methods that Tesla uses. While default estimated lives exist for depreciable assets, Tesla lists the estimated life for each of its classes of assets. Computer equipment and software is given a 3-year life, reflecting how fast technology reaches obsolescence, especially in a novel company like Tesla. Surprisingly, furniture, machinery, and equipment is depreciated with a useful life of anywhere between 3 and 12 years, even though these assets usually see longer lives than computer equipment. Tesla’s buildings and their improvements are also given a shorter-than-typical useful life at 30 years. These low estimates of useful life could reflect the common desire for a company to have a relatively high depreciation expense in any given year to help minimize income tax expense. All of the aforementioned assets are depreciated with the straight-line method, but Tesla mentions that the tooling equipment in its plants is depreciated using the units-of-production method. Tesla estimates that these tools will have a useful life of 125,000 vehicles.
Tesla also talks about intangible assets and amortization. The financial statements mention that their intangible assets are comprised completely of emission permits related to their production factories. These assets are depreciated in the straight-line method, and they are listed as “Other Assets” in the balance sheet. Also interesting is Tesla’s mention that a lot of its interest expense is actually capitalized to property, plant, and equipment. Tesla assigns this interest to its constructions in progress, and amortizes it over the life of the asset it is assigned to. From what I understand, this means that any interest expense that Tesla incurs on debt directly related to its constructions in progress is simply capitalized to that related construction, rather than listed with the interest expenses on unrelated debts.
Another interesting aspect of Tesla’s financial statements requires a closer look at inventory. As mentioned, Tesla’s enormous inventory proved to be detrimental to its cash flows. At year-end 2011, Tesla had an inventory balance of $50M. By year-end 2012, the inventory balance had shot up to $269M. In terms of turnover, Tesla’s inventory turnover ratio was only about 2.6, which is drastically smaller than their competitors Honda and Toyota (8.2 and 12.3, respectively.). Tesla sells inventory at an incredibly low rate, and it is interesting to speculate as to why. In its financial statements, Tesla breaks down inventory into 4 categories: raw materials, works in process, finished goods, and service parts. In 2011, Tesla’s raw materials made up for about 25% of its inventory book value. However, in 2012, raw materials accounted for around 61% of its inventory. Consequently, 2011 had a finished goods balance that took up 52% of inventory, whereas in 2012, finished goods only made up for 23% of inventory. These numbers could suggest that Tesla has an incredibly amount of raw materials that it cannot use quickly enough to manufacture vehicles, or perhaps that Tesla projected a much higher demand in 2012 than it wound up getting. Either way, an investor may consider Tesla’s inventory balance and inventory turnover to be a red flag. Furthermore, the supplemental notes in the financial statements did not explain the inventory balance any further than breaking it down into the 4 categories mentioned earlier.
Tesla Motors. (2013). Annual Report. Tesla Motors, Inc. Retrieved on 24 November 2013 from http://ir.teslamotors.com/secfiling.cfm?filingID=1193125-13- 96241&CIK=1318605