Tesla Motors Financial Analysis

Tesla Motors, the brainchild of the PayPal co-founder Elon Musk, has been in the news recently with their award-winning Tesla Model S, a sedan capable of beating out a Viper R/T in a drag race. But how are their finances?

5/1/2017 update: We updated our Tesla Motors analysis for 2012 – 2016, published here »

Real Revenue Growth

The nominal and real annual revenue growth rate has been highly variable over the years yet nominal annual growth rate and real revenue growth have both averaged around 78% with the greatest real revenue growth in 2009. This type of on and off intense annual revenue growth is very hard on the company balance sheet resources.

Sustainable Revenue Growth

When looking at real revenue growth we want to know if it is sustainable. In the last four years, the first three were completely unsustainable. In a sense the company is living off the balance sheet resources similar to depleting your emergency savings account. In 2012 the company turned strongly sustainable, although primarily due to a strong slowdown in sales based on annualized year to date September 2012 financials.

Pricing Policy

By 2012 end of third quarter (on an annualized basis,) the gross profit mark-up index drops a dramatic 27%, resulting in a decline in gross profit margin of 81% and 87% in gross profit dollars. By 2012 you could buy a Tesla car for the cost of production with little or no mark-up on the costs to produce!

Operating Expense Control

Sales over the last four years have been somewhat flat, going from $112 million in 2009 to an annualized amount of around $143 million based on the year to date third quarter results. The cost of goods is driving upward and the net operating income is collapsing deeper into the red with now five years of losses and mounting.

EBITDA to Actual Cash Flow

EBITDA and net operating income are all coming in negative and becoming consistently more negative. More importantly, the cash flow before financing is beginning to run into the red with no end in sight.

Debt Free Cash Flow

With revenues over the years being somewhat flat all forms of cash flow are slipping down a greased pole.  There are ways around this, but the company has not yet figured out how or has decided not to address the issue, dangerous at best.

Excess Cash

Cash is not a great determinant here for survivability compared to excess cash generation. Cash can come from additional equity or debt financing but excess cash generation can only come from working capital and the company is aggressively and successfully reducing its working capital needs – the only bright area in the company’s finances.

Return on Assets (ROA)

All forms of return on assets are negative, eating up 30% to 40% of balance sheet capital – a voracious pace. Only the aggressive excess cash generation is offsetting this destruction of capital but not for long.

Working Capital Needs

The improving efficiency of working capital needs is being overwhelmed by the operating income losses that are starting to accelerate further. This is totally unsustainable and can only be offset by more equity investments.

Debt Financing

Asset growth has been at around 100% per year compared to revenue growth rate at 78% annually. Total liability annual growth has only grown at 58% annually, which forces the demand for more equity. Currently the book equity is at a negative net worth of near $50 million. Over the last four years another $900 million in equity has been needed to keep things running.

Net Trade Cycle

Net trade cycle days have dropped from a very lengthy 141 days to 21 days, freeing up $400,000 to cash for every day reduced. The only problem now is that the net trade cycle days cannot be reduced much more unless vendors will wait over 400 days on average to be paid as is currently the case! This solution is running out of gas rapidly and no gas stations in sight.

Cost of Capital and EVA

The company’s average weighted cost of capital is around 18% annually after adjusting for negative equity and over 100% debt financing. The company’s return on assets (ROA) is an average negative 28% annually, which means that the company is destroying wealth at a voracious annual rate of over 45%. This rate of wealth destruction is not a leak but the bursting of a dam.

5/1/2017 update: We updated our Tesla Motors analysis for 2012 – 2016, published here »

Relevant:

• Tesla Model S beats a Viper R/T in a drag race
• Tesla’s ingenious strategy
• Tesla vs. The NY Times regarding a potentially insincere test drive write-up