Financial Performance Analysis of Tesla Motors

Financial Performance Analysis of Tesla Motors

Financial Performance Analysis of Tesla Motors

Table of Contents

Introduction......................................................................................................................................1
Tesla's Risks.....................................................................................................................................2
Financial performance (Ratio analysis)...........................................................................................5
Regression model...........................................................................................................................10
Conclusion.....................................................................................................................................13
Reference:......................................................................................................................................14
Appendix........................................................................................................................................16
Financial Performance Analysis of Tesla Motors

Introduction

Tesla, Inc., which was initially known as Tesla Motors, an American electric automobile
manufacturer that was founded on July 01, 2003, in San Carlos, California in the United States.
This company was founded by American entrepreneurs Martin Eberhard (CEO) and Marc
Tarpenning (CFO). Tesla was named in honour of a Serbian American inventor Nikola Tesla
(Gregersen & Schreiber, 2018). The primary source of the company's initial funding came from
Pay Pal's co-founder Elon Musk, contributing more than $30 million, and he was appointed as
chairman of the company in 2004 (Tesla Inc, 2020).
Products
Tesla Motors released its first car in 2008, which was called the Roadster. The Roadster
was comparable to other gasoline-powered sports cars, and it attained high ratings and approvals.
This prompted the company in 2012 to introduce another design to its fleet, which was known as
the Model S Sedan. It had its batteries underneath the floor, which gave extra storage space in
front and improved handling due to its low center of gravity. The evolution of the Model S made
the company put an end to the production of the Roadster. A further modification was made on
the Model S in 2014 when it was modified to autopilot. 
Tesla launched the Model 3 in 2016, which is ranked today as the world's all-time best-selling
plug-in electric car. It was also modified to include acceleration boost and rear heated seats and
launched the Tesla Semi in 2017, which were huge savings on fuel. In 2019, the Tesla brand yet
again unveiled the Model Y mid-size SUV and cyber truck to its growing fleet. On March 9,
2020, Tesla produced its one-millionth electric car, and it became the first electric car
manufacturer ever to achieve such height.
Geographical reach
The production of vehicles is at the company's factories in Fremont, California, with its
headquarters in Palo Alto, California; its operating factories are in Fremont, California, while it
has branches spread out to over forty countries all over the world, such as Tilburg in the
Netherlands, Berlin, New York, Germany, Shanghai, and China. China accounts for over 10% of
its sales. 
Sales and marketing
Financial Performance Analysis of Tesla Motors

Tesla sells its cars directly to its customers. Part of their sales strategy is not to do advert
but to educate its customers through the shops, internet, or galleries. It avoids any form of the
dealership. And its manufacturing strategy was to improve on the existing product continuously.
Tesla allows for a swap of an old car for a new tesla and to pay the fare difference. This
marketing strategy allows for an increase in sales. Part of Tesla's vertical integration was the
introduction of different stations in all countries where their cars were being sold, also known as
superchargers, where customers can charge their car batteries at no extra fee. 
As a demonstration of their safety concerns, production employees, before their acceptance and
on the job, must undergo continuous training on safety and improvement. Tesla also maintains a
sustainable energy ecosystem by manufacturing energy solutions such as power well, power
back, and the solar roof to help encourage homeowners and businesses, manage renewable
energy, storage, and its consumption. This has also led to the creation of job opportunities for a
significant number of people worldwide (Tesla, 2020).  

Tesla's Risks

Risk can lead to profit shrinkage, operational problems, and financial hardship. Tesla has
several risk factors associated with its stock purchasing. Some of the risks are mentioned below:
Internal Risks:
Inability to pay dividends:
The company did not pay dividends, while Ford and General Motors, which are big
automakers in the automobile industry, have paid dividends. However, Tesla did not pay since
IPO in 2010; it never paid the dividend because of its negative cash flow and its consistent
losses, which deprives this company to pay dividends. Moreover, it has a large number of debts,
and this is restricting this company from distributing the company's profits through dividends.
Instead of paying dividends, shareholders only can hope for capital gain for the company shares
when the company starts consistently making substantial cash flow and makes a profit.
Unable to service its debt loads
Tesla may not be capable of servicing its debt loads. Tesla's inability to serve the debts
due to Covid-19 and its sinking economy as it has no control over external factors made the
company stand at high risk. Tesla's total debt, including leases, borrowing, and interest expenses,
has almost reached $16 billion in Q2, 2020, which is recorded very high.
Financial Performance Analysis of Tesla Motors

For three years, there is a steady increase in the interest expense due to its rise in
indebtedness. 
Annually, Tesla's interest expense amounts to $471 million in 2017 and $663 million in 2018,
and $685 million in 2019. In the past three years, its operating income is -$1632 million, -$388
million, and -$69 million in 2017, 2018, and 2019 respectively. Between 2017 & 2019, it has a
loss in its operations, which has resulted in low profits in operation that has unable to cover
reasonable interest expense. Tesla has to resort to the capital market for raising the cash and for
funding its operation and for debt repaying due to its unprofitable business. In any case, if Tesla
fails to get adequate capital, then the company will be at risk of going out of business.
External Risk:
Tesla has acknowledged the new risk "Health Epidemics" in the financial filing, and this
is because of the outbreak of coronavirus. This has an adverse impact on operations and
production delays causing the weak economic condition. At the time of the initial outbreak, Tesla
has to delay the production of model 3 because of a factory shutdown imposed by the
government, which had a significant impact on the company's profitability.
Effects of Covid on Tesla:
Due to the global spread of Covid 19, people were not willing to buy new cars. Inevitably
discretionary spending will drop as the economy falls into a recession. Due to this risk, it has
suspended its manufacturing at Fremont, where vehicles were manufactured in bulk.
The global recession was adversely affecting the company's revenue by considerably falling in
the subsequent quarters. In the worst-case scenario, if the company fails to come up with proper
risk management, there may be the risk of decreasing the stock price even lower than expected.
Tesla has been one of the most significant companies in the automobile industry of the world as
it has been producing some of the best electric vehicles. However, a great company does not
mean a significant investment. Investors need to consider various aspects, namely cash flow,
profitability before making decisions on investment. Tesla is not suitable for defensive investors,
such as retirees who are interested in dividend income.
Risk Management Plan
At the initial stages of developing the electrical Vehicle, Tesla was operating in
uncertainty because of the already existence of the electrical vehicle trend. Tesla, from the
beginning, needed efficient Risk management that can help the company to identify various risks
Financial Performance Analysis of Tesla Motors

that can affect its economy. Piscopo (2015) states that Risk management's primary purpose is to
establish a planned framework through which the organization can identify the possibility of risk
and can develop new strategies for reducing the impact of risks.
Tesla's Risk management must include the following aspects for implementation as a measure to
reduce the impact of risk on the company.
 Assessing Risk Management team with responsibilities and the team will be responsible
for identifying and monitoring the company's potential risk. Such as delays in the
development of the product, factory, and also identify the critical failures of already
implemented strategies.
 It is maintaining a reporting system to keep the stockholders well informed about the
potential risks and its assessments so which helps them to make informed decisions in the
future.
 It is developing and maintaining a schedule of Tesla's business operations in detail that
consists of cost resources and scope of the project.
 We are identifying the detailed project cost and required resources which are available
and identify the feasibility to avoid cost overrun, which may have an adverse effect on
the deadlines of the production.
 Developing development plans that are straightforward to ensure the project
accomplishes successfully before undertaking another risky project.
 Financial Performance Analysis of Tesla Motors

Financial performance (Ratio analysis)

Ratio Formula 2019 2018 Industry All industry

ratio ratio
Current ratio Total current assets 1.13 0.83:1 1.50 1.55
Total current liabilities

Debt equity Longterm debt 1.79 2.07:1 0.67 0.63

Total equity

Gross profit margin Revenue−Cost of goods sold 16.55% 18.83% 18.4% 44.9%
Revenue

Net profit margin Net profit (3.5%) (4.5%) 3.7% 3.3%

Revenue

Inventory turnover Cost of goods sold 5.77 5.59 - -

Total Inventory
Times Times

Return on equity Net income (10.37%) (18.46%) 26.6% 3.2%

Average shareholders equity

Current ratio

As per the calculations, Tesla's current ratio in the year ending 2019 is 1.13:1, which
states that Tesla is in a strong position to cover its short-term obligations. Investors who will be
looking to invest will be satisfied with the liquidity of the company. The company has been
running into losses; therefore, the company must regain its customers' confidence. Hence the
company's current ratio was improved significantly from last year. In 2018, the company had a
current ratio of less than 1, which meant that the company did not have enough funds to meet its
liabilities due within one year. Tesla's major portion of current assets is made of cash and
inventory. In 2018, Tesla used most of its cash in the Model 3 car production, which was the
reason for their low liquidity. However, by the end of 2019, they were a noticeable increase in
Financial Performance Analysis of Tesla Motors

their cash by around 58%, which was the primary reason for the improvement in their current
ratio.

Debt equity ratio

Tesla's debt-equity ratio is moderately leveraged at 1.79:1 by the year ending 2019, i.e., is
for every dollar equity they hold, they have almost double the debts against it. For the initial
years between 2015 and 2016, Tesla was inclined more towards debt financing as it was cheaper
for the company to raise funds through loans rather than raising funds from the market. In 2015,
Tesla's debt was almost four times the equity. However, this ratio dropped significantly in the
year 2016, when Tesla did a massive equity issuance. Since then, they have tried to maintain a
balance between debt and equity.

Companies prefer debt financing as they find it cheaper because interest payment is
usually less than the returns on equity. As per our understanding, there has been a shift in Tesla's
choice from debt to equity in recent years because Tesla is running into losses, and the
shareholders are not expecting much return. However, in debt financing, the company will have
to return the principal plus the mandatory interest. We believe Tesla will have to be careful with
this approach, as issuing more equity will dilute its ownership in the company.

Gross margin

Tesla's gross margin is around 16.5%, which means the percentage of profit Tesla is
earning after deducting the direct cost. In comparison to the year 2018, there has been a decline
of 2% in the gross profit in the year 2019. Profit is the index for the performance of any
company. As per us, the company's gross profit is less, which is the primary reason for its overall
loss. There are two possible reasons that the company is not earning high profits. One could be
that the company's product is not priced appropriately, and secondly, the cost of production is too
high. In the case of Tesla, we could observe that out of Tesla's total revenue by selling the
vehicles, the cost incurred by the company in producing the units is 83% of the total sales in
2019. This is why the company does not have enough profits to cover the operational expenses,
eventually turning into losses.

Compared to its competitors, Tesla's concept is not the same as the other traditional cars
model. Tesla deals with electric cars. The reason they are expensive is the electric battery packs
Financial Performance Analysis of Tesla Motors

that supply power to cars. It is uncommon in the market, making it more costly to afford. To
improve its gross profit margin, the company will have to increase its market share and try to
find effective ways to reduce production costs.

Net profit margin

Tesla has not been earning profits for years and is making continuous losses. Tesla had
made a loss of 3.5% in the year 2019, but it is less than the losses incurred in 2018.

In our observation, sales of the company are unable to cover the operational expenses
leading to losses. The company is incurring huge expenses on research and development because
it is continuously trying to bounce back for years. They have been trying to improvise and make
improvements in their car models, which require research. However, the expense of research and
development is more than 30% of the total operational cost. The company's cash flow depicts
that the company is incurring huge expenses on non-cash items like depreciation. In the year
2019, there has been an increase of 1,657 million US dollars on charging for depreciation, which
adds extra financial stress to the company. Although the company will incur extra costs to
increase its sales, the company will have to rework its strategies, reduce its costs, and increase its
sales.

Inventory turnover

In the year 2019, Tesla's financials with an inventory turnover ratio of 5 times explains its
efficiency in terms of inventory management. This means how often Tesla's inventory is
converting into a sale in a given year. In the year 2019, Tesla's inventory constituted almost 30%
of their total current assets, while in 2018, it was more than 35%. Tesla's inventory includes raw
material, work in progress, finished goods and service parts. In comparison to cash, inventories
are considered to be less liquid as they can take some time to convert into a final sale, depending
on the demand of the product. For Tesla, we can comment that they have been pretty good in
forecasting the demand for their cars, and also, they have been receiving increased demand for
its cars. This continuous growth rate for the company in terms of its inventory has expanded the
company's working capital.
Financial Performance Analysis of Tesla Motors

Return on equity

Tesla has a negative return on equity of (10.37%) for the year 2019. The reason for the
negative return is the losses of the company. The company is not able to earn any profit against
the money invested by the shareholders. Even though the company has a negative return on
equity, Tesla's negative return is not the basis for judging their growth. There are much
expenditure incurred by the company, but those are one-time expenses. The company is in the
growing stage. The money they are investing in today will provide returns in the future to the
shareholders.

Financial strategy evaluation

The company's overall financial strategy is quite similar to that of a growing company in
the market. Looking at the company's financials, we can note that the company cannot earn profit
for the past so many years. The eye-catching figures are the company's increasing sales every
year. The company's revenue has increased by 14% from the last year. Also, their losses have
decreased by 288 million US dollars from the previous year. The company's strategy since the
beginning has never been about earning profits. The idea and technology of electric and
environment-friendly vehicles are not the same as traditional automobile companies. Looking at
the company's cash flow, we can understand that Tesla's reliance is upon the inflow from the
financing activity, and outflow is towards the investing activity that will benefit them in the long
run. Tesla presently wants to meet its consumers' expectations without compromising on the
quality. Even though their sales are increasing with high demands, they are into losses. On the
contrary, the company's liquidity position is healthy, with cash of 6,783 million US dollars,
which they can reinvest for interest earnings. The changing strategy of Tesla, where they are
financing their business by issuing more equity than debt, will be favourable for them until a
limit; otherwise, they might lose the company's ownership.

Industry Ratio

Industry ratios are calculated based on the average of all the companies existing in the
same industry. On the other hand, all industry ratios are calculated, considering all the industries
persistent in the market. Although Tesla's gross profit margin has decreased by two percentage
points from the previous year, it is only two percentage points below the Automobile Industry
Financial Performance Analysis of Tesla Motors

margin (Ready Ratios, 2020). It indicates Tesla's efficiency to all the investors and how well its
management and operations are against its competitors.

When Tesla is compared to other industry companies, it is the fastest-growing company

due to its unique offerings. Since it is an electric car, it is developed based on hardware that
could be updated in no time, unlike traditional industry cars that are driven without any
upgradation. The other reason for its success is that the traditional automobile makers are ill-
equipped to compete with software-centric cars. Tesla is making losses, but the number of
deliveries is increasing (Figure 1). This is due to high operational costs incurred in software and
expensive battery parts.

Figure 1

Key Metrics Trailing 12 months

Note: Tesla. (2019), from https://tesla.gcs-web.com/static-files/b3cf7f5e-546a-4a65-9888-

c928b914b529

The company makes it easy for the customers to buy their products, has the advantage of
being green by causing no pollution and eliminates visits to gas stations entirely (Shipley, 2020).
This is how Tesla became the world's second most valuable automaker due to its software.
Financial Performance Analysis of Tesla Motors

Regression model

Predicting the return of Tesla's stock is difficult since there are nearly infinite variables
that could affect a company's share price. Also, Elon Musk often uses Twitter to reveal the next
steps in the company's strategy, which may affect the investor's behaviours. The way people feel
about the company at a certain point in time tremendously affects the stock trend, which is one
aspect of behavioral finance. Since it is complicated to do so, in this paper, we simply study the
relationship between stock price and time by using the regression model on Microsoft Excel.
Daily stock prices of Tesla are extracted from the Tesla website in the Investor category. This
data set contains the open, high, low, close on every day throughout the five years from
November 30, 2015, to November 30, 2020 (Exhibit 1). We use a simple linear regression model
aiming to understand how the dependent variable (a stock price or return) is impacted when an
independent variable ( time) changes. 
Our linear regression is described in the following equation:
Y=b*x+c
In which: y is the stock price or stock return
                 x is the daily time from 11/30/2015 to 11/30/2020: 5 year periods

Regression on the date and stock price

The result of the regression on Tesla's stock price and date show a positive and upward
trend relationship with the Model as (Exhibit 2):
Y= 0.164x – 10.964
Also, it shows that there seems to be a positive correlation ( 0.164) between the daily
changes in stock prices and the time. To put this into words, one day past should result in
roughly 0.164 increases in stock price daily. Also, we notice that the R-squared value, which
shows the proportion of variability in the daily stock price changes explained by the Model, is
37%. That is not a good fit due to a dramatic change in stock price since early 2020, as also seen
from the graph below showing that many points fall over the regression line from early 2020.
Tesla's stock price surged is thanks to its releasing quarter earnings report that topped
expectations (Klebnikov, 2020). Also, Tesla is not a traditional automobile company. It is a
Financial Performance Analysis of Tesla Motors

pioneer in an electric and modern car that attracts a lot of interest from investors. Its influence
comes from the ambitious plans from Elon Musk that make people believe in the bright future of
electric cars and Tesla as well. That's the reason why stock price surge significantly, making the
Model less effectively reflect the usual trend. 
Plot 1 below shows that the close price increases in general over the past five years. In
addition, our predicting line indicates that Tesla's price will keep moving forward following the
model y=0.164x -10.964.
Plot 1. Data line fit of stock price and date regression

Date Line Fit Plot

800
600 close
400 Linear (close)
close

Predicted close
200
f(x) = 0.16 x − 10.96 Linear (Predicted close)
0 R² = 0.37
-200 0 200 400 600 800 1000 1200 1400

Date

Regression on the date and stock return

Because Tesla does not pay a dividend to shareholders that are explained as the intention
to retain all future earnings to finance future growth, the stock return only depends on changes in
price. Therefore, open price and close price of the stock are used as a general measure of stock
return with the formula as Stock return = (Close price- Open Price)/ Open Price * 100%
Similarly, we regress on stock return and date, with the result showing that there is a
fragile relationship between stock return and date (Exhibit 3). Specifically, R-squared = 0.00127
indicates that only 0.12% stock return is explained by date. And the coefficients in the Model are
very small, showing a minor relationship. The Model is:
Y= (3E-06)x - 0.001
The plot shows almost all the points fall over from the trend line. Also, the trend line does not
show any specific either upward trend or downward trend.
 
Financial Performance Analysis of Tesla Motors

Plot 1. Data line fit of stock return and date regression

Date Line Fit Plot

20.00%
15.00%
Return on Tesla's stock

10.00%
Return on Tesla's stock
5.00% Linear (Return on Tesla's stock)
Predicted Return on Tesla's stock
0.00% Linear (Predicted Return on Tesla's stock)
f(x) = 0 x − 0400
-5.00% 0 R² =200 600 800 1000 1200 1400
0
-10.00%
-15.00%
Date

Investment strategy
The investment strategy recommended for Tesla stock is a long-term investment for various
reasons.
 The regression on Tesla stock price shows an upward trend with the Model as Y=0.164x
– 10.964 that investors will gain significant earnings from the higher price in the future.
 Tesla has undertaken a massive expansion of manufacturing, and the CEO Elon Musk is
a genius guy with a wild and ambitious idea to expand electric cars all over the world by
2027 (Gene, 2017). Thus, investors believe that electric cars will be the future car. Based
on the fundamental analysis, we believe this a factor that affects the company's business
and its future prospects.
 Even though the company began its operations years back but still it is under growing
age. The reason is the company's primary objective, which is not profit maximization but
higher market share in the long-run. Tesla's products' demand and sales are high in the
market, and its investors value them. Therefore, the losses alone cannot describe the
company's financial performance, but the value it has created in the stock market and
customer market.
Financial Performance Analysis of Tesla Motors

Conclusion

With constantly increasing yearly sales and revenue, Tesla has solidified its position as
the 2nd most valuable car manufacturer and a prominent leader in its class of Battery Operated
Electric Vehicles. Even though since its public offering, the company has not been able to
generate any profit, but in the recent times it has been able to reduce its net losses before taxes
from $1.63 billion in 2017 to a mere $69 million in 2019. Further it is prone to the risk of single
product dependency for major revenues, its inability to generate adequate cash or service its
debts and risk of global recession from covid-19 leading to subsequent fall in company’s
revenue. Irrespective of the hardships Tesla was able to maintain its trajectory of a growing
company as its stock are at an all-time high $ 649.88 as on December 08, 2020. The stock price
of the company is a strong measure as we observed, on regressing the gradual date and stock
price increase, depicts a positive correlation of the stock price increasing by 0.164 daily, on the
other hand the gradual date and stock return portray a weak relationship. Further the financial
performance of the company concluded in terms of ratio analysis which are gradually year by
year aligning with the Industry averages depicting a fast growing company as a result of being
the class leader and initiator of green battery powered Electric vehicles
Financial Performance Analysis of Tesla Motors

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Financial Performance Analysis of Tesla Motors

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Financial Performance Analysis of Tesla Motors

Appendix

Exhibit 1: Tesla's data set

Financial Performance Analysis of Tesla Motors

Exhibit 2: Stock price regression summary output

Financial Performance Analysis of Tesla Motors

Date Residual Plot

500
400
300
Residuals

200
100
0
-100 0 200 400 600 800 1000 1200 1400
-200
Date

Exhibit 3: Stock return regression summary output

Date Residual Plot

0.2
0.15
0.1
Residuals

0.05
0
-0.05 0 200 400 600 800 1000 1200 1400
-0.1
-0.15
Date