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Tesla case study question

Tesla has shown improvement in cash generation from operations, with a positive trend over three years and a significant increase in 2020. The company utilized cash from operations primarily for capital expenditures and debt repayment, indicating a focus on growth and improved solvency. Tesla's financing strategy involved reducing debt and issuing equity, with plans to reinvest earnings to support future growth.

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10 views

Tesla case study question

Tesla has shown improvement in cash generation from operations, with a positive trend over three years and a significant increase in 2020. The company utilized cash from operations primarily for capital expenditures and debt repayment, indicating a focus on growth and improved solvency. Tesla's financing strategy involved reducing debt and issuing equity, with plans to reinvest earnings to support future growth.

Uploaded by

Yara Aziz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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and the value of the ratio rose to 4.81. This value is better than industry (5.33).

Finally, TIE in 2020


(2.77) is significantly lower and worse than industry (10.2). This confirms the indication of profitability
analysis that interest expenses are relatively high for Tesla compared to the industry. Tesla could try
to negotiate better interest rates with its creditors considering its improvement in solvency and
positive prospects about profitability and cash flows.

Question 4 (5 pts): Based on Exhibit 6 (Three-year historical cash flow statement), explain: 1) if the
company has generated an adequate level of cash from the operating activities over the three years
and why; 2) how the company has mostly used this cash from operations in 2020 by focusing both on
Cash Flow from Investing Activities and Cash Flow from Financing Activities; and 3) what information
on the company’s financing strategy in 2020 can be inferred from the analysis of Cash Flow from
Financing Activities.

1) Tesla has generated an adequate level of cash over the three years. Indeed, Cash from Operations
is positive over the three years and far above the net income which is negative in 2018 and 2019.
Finally, Cash from Operations shows a parallel positive trend with net income. Indeed, Cash from
Operations increases significantly in 2020 when net income becomes positive.
2) Tesla has used the cash from operations (5,943M) to invest in capital expenditure and increase its
manufacturing capacity as shown by the significant increase in cash outflow from investing in 2020 (-
3,132M in 2020, +125% compared to 2019). In addition, as reported in Cash from Financing, the
company repaid its long-term debt (2,488M net repayment) with a positive impact on its solvency as
also shown by the solvency ratios.
3) The financing strategy of the company consists of reducing its debt and replace it with equity.
Indeed, the company issued common stock for 12,686M and decreased its debt by 2,488M. Therefore,
as indicated in the annual report, the company sustained growth has allowed Tesla’s business to
generally fund itself. The final effect is an increase in solvency and decrease in company risk for
creditors and shareholders with an expected beneficial reduction of both cost of debt and capital. Tesla
has not paid dividends to its shareholders by preferring to completely reinvest its earnings in 2020.
The significant amount of cash generated by operating and financing activities is expected to be used
to finance the future growth of Tesla.

APPENDIX

Tesla Inc. business description and annual report

Business overview
We design, develop, manufacture, sell and lease high-performance fully electric vehicles and energy
generation and storage systems, and offer services related to our sustainable energy products. We
generally sell our products directly to customers, including through our website and retail locations.
We also continue to grow our customer-facing infrastructure through a global network of vehicle
service centers, Mobile Service technicians, body shops, Supercharger stations and Destination
Chargers to accelerate the widespread adoption of our products. We emphasize performance,
attractive styling and the safety of our users and workforce in the design and manufacture of our
products and are continuing to develop full self-driving technology for improved safety. We also strive
to lower the cost of ownership for our customers through continuous efforts to reduce manufacturing
costs and by offering financial services tailored to our products. Our mission to accelerate the world’s
transition to sustainable energy, engineering expertise, vertically integrated business model and focus
on user experience differentiate us from other companies.

Please find below an extract of the Annual Report for fiscal year 2020:

Overview and 2020 Highlights


Our mission is to accelerate the world’s transition to sustainable energy. We design, develop,
manufacture, lease and sell high-performance fully electric vehicles, solar energy generation systems
and energy storage products. We also offer maintenance, installation, operation, financial and other
services related to our products.

In 2020, we produced 509,737 vehicles and delivered 499,647 vehicles. We are currently focused on
increasing vehicle production and capacity, developing and ramping our battery cell technology,
increasing the affordability of our vehicles, expanding our global infrastructure and introducing our
next vehicles.

In 2020, we deployed 3.02 GWh of energy storage products and 205 megawatts of solar energy
systems. We are currently focused on ramping production of energy storage products, improving our
Solar Roof installation capability and efficiency and increasing market share of retrofit solar energy
systems.

In 2020, we recognized total revenues of $31.54 billion, representing an increase of $6.96 billion
compared to the prior year. We continue to ramp production, build new manufacturing capacity and
expand our operations to enable increased deliveries and deployments of our products and further
revenue growth.

In 2020, our net income attributable to common stockholders was $721 million, representing a
favorable change of $1.58 billion compared to the prior year. In 2020, our operating margin was 6.3%,
representing a favorable change of 6.6% compared to the prior year. We continue to focus on
operational efficiencies, while we have seen an acceleration of non-cash stock-based compensation
expense due to a rapid increase in our market capitalization and updates to our business outlook.

We ended 2020 with $19.38 billion in cash and cash equivalents, representing an increase of $13.12
billion from the end of 2019. Our cash flows from operating activities during 2020 was $5.94 billion,
compared to $2.41 billion during 2019, and capital expenditures amounted to $3.16 billion during
2020, compared to $1.33 billion during 2019. Sustained growth has allowed our business to generally
fund itself, but we will continue a number of capital-intensive projects in upcoming periods.

Management Opportunities, Challenges and Risks and 2021 Outlook


Impact of COVID-19 Pandemic
There continues to be worldwide impact from the COVID-19 pandemic. While we have been relatively
successful in navigating such impact to date, we have previously been affected by temporary
manufacturing closures, employment and compensation adjustments, and impediments to
administrative activities supporting our product deliveries and deployments. There are also ongoing
related risks to our business depending on the progression of the pandemic, and recent trends in
certain regions have indicated potential returns to limited or closed government functions, business
activities and person-to-person interactions. Global trade conditions and consumer trends may further
adversely impact us and our industries. For example, pandemic-related issues have exacerbated port
congestion and intermittent supplier shutdowns and delays, resulting in additional expenses to
expedite delivery of critical parts. Similarly, increased demand for personal electronics has created a
shortfall of microchip supply, and it is yet unknown how we may be impacted.
EXHIBIT 1: Three-year historical income statement
Currency (Thousands) USD USD USD
INCOME STATEMENT 2020 2019 2018
Total Revenues 31,536,000 24,578,000 21,461,268
Cost of goods & services -23,285,000 -19,095,000 -16,309,247
Gross profit 8,251,000 5,483,000 5,152,021
R&D expense -1,491,000 -1,343,000 -1,460,370
Selling, Gen. & Admin. Costs -3,145,000 -2,795,000 -2,969,724
EBITDA 3,615,000 1,345,000 721,927
Depreciation & Amortization -1,621,000 -1,414,000 -1,110,000
Operating Income after D&A 1,994,000 -69,000 -388,073
Exceptional Expenses -8,000 45,000 20,366
EBIT 1,986,000 -24,000 -367,707
Net Interest -718,000 -641,000 -638,538
Before Tax Earnings 1,154,000 -665,000 -1,004,745
Income Tax -292,000 -110,000 -57,837
Earnings after Tax 862,000 -775,000 -1,062,582
Minority Interests -141,000 -87,000 86,491
Net Income 721,000 -862,000 -976,091
Ordinary Dividends 0 0 0
EXHIBIT 2: Three-year historical balance sheet
Currency (Thousands) USD USD USD
BALANCE SHEET - ASSETS 2020 2019 2018
Cash & Equivalent 19,384,000 6,268,000 3,685,618
Short Term Investments 238,000 246,000 192,551
Accounts Receivable 1,886,000 1,324,000 949,022
Stocks Inventories 4,101,000 3,552,000 3,113,446
Prepayment & Advances 1,091,000 713,000 365,671
Other Current Assets 17,000 0 0
Total Current Assets 26,717,000 12,103,000 8,306,308
Long Term Investments 0 393,000 421,548
Net Property Plant & Equipment 12,747,000 10,396,000 11,330,077
Goodwill & Intangibles 520,000 537,000 350,651
Leasing & Investment Properties 10,599,000 9,803,000 8,361,154
Other Long-Term Assets 1,565,000 1,077,000 969,876
Total Assets 52,148,000 34,309,000 29,739,614
BALANCE SHEET - LIABILITIES 2020 2019 2018
Accounts Payable 6,051,000 3,771,000 3,404,451
Short Term Debt 374,000 0 345,714
Current Portion of Long-Term Debt 1,758,000 1,785,000 2,221,985
Taxes Payable 777,000 611,000 348,663
Other Current Liabilities 5,288,000 4,500,000 3,671,323
Total Current Liabilities 14,248,000 10,667,000 9,992,136
Long-Term Interest-Bearing Debt 9,556,000 11,634,000 9,403,672
Deferred Tax 151,000 0 0
Provisions 1,508,000 1,290,000 876,051
Other Long-Term Debt 2,955,000 2,608,000 3,154,151
Total Liabilities & Debt 28,418,000 26,199,000 23,426,010
Common Stock/Shares 1,000 0 173
Additional Paid in Capital 27,260,000 12,737,000 10,249,120
Shareholders' Reserves 363,000 -36,000 -8,218
Retained Earnings -5,399,000 -6,083,000 -5,317,832
Minorities in Sharehold. Equity 850,000 849,000 834,397
Total Shareholders' Equity 23,730,000 8,110,000 6,313,604
Total Liabilities & Equity 52,148,000 34,309,000 29,739,614

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