Sensitive Analysis of Tesla Motors, Inc.


Term Paper, 2017

31 Pages, Grade: 1,3


Excerpt

Inhalt

Situation analysis
History
Capital Budgeting

Ratio analysis
Working capital ratio
Working capital turnover
Quick Ratio
Profit margin
Total asset turnover
Fixed asset turnover ratio

Further observations – Competitor Analysis
Barriers to Entry
Bargaining Power of Buyers
Bargaining Power of Suppliers
Industry Competitors
Threat of Substitute Products

Conclusion and recommendation

Resources

Appendix I Sensitive Analysis – Own Calculations/Analysis

Sensitive Analysis of Tesla Motors, Inc.

The following paper will summarize the findings of the sensitivity analysis of Tesla Motors Inc. (Tesla) for the last four years. In doing so, the information presented are described, methodically categorized and then analyzed. In a first step the overall situation of Tesla is analyzed. In a next step, the analysis focuses on different ratios based upon the financial statement, balance sheet and cash flow analysis. Then, additional observations in form of a competitor analysis are introduced. Finally, a conclusion will show that Tesla, while showing great promise, should improve upon its economic efficiency and effectiveness. Therefore, Telsa should provide an adjusted/revised action plan before investors should consider investing in the company.

Situation analysis

The following situation analysis will comprise a very brief overview of Tesla’s history and approach to capital budgeting.

History

Tesla Motors, Inc. was founded 2003 in Palo Alto with the goal of establishing sustainable transportation. Thus, the American company focuses on the development of electric vehicles. Since 2004 Elon Musk acts as Chairman of the Supervisory Board and is defining figure in public reception. The company has more than 13,000 employees. With its Tesla Roadster that was built between 2008 and 2012, the company was automobile manufactures utilizing lithium-ion cells. Tesla is currently producing the S and X models in Fremont, California. In addition to its main business, Tesla sells various components for trains. (Tesla, 2017)

Capital Budgeting

Corporation as well as government agencies have to factor in competition, financing option as well as long-term financial planning in their investment / capital spending (Verves, 2012). A benefit-cost analysis should be applied to every endeavor undertaken (Verves, 2012). Due to the responsibility to the taxpayer or the stakeholder, every project should be beneficial to these stakeholders and thus fiscally sound. Federal governments often budget “both capital and operating expenditures in the unified budget on a cash-basis” (ibid). Essentially, this leads to a certain process: The budget authority is “scored upfront” (ibid), while the outlays are spread out over the duration of the project (ibid).

Corporations have a similar but different focus. Here, capital budgeting is used for project planning. The planned endeavors can be categorized thusly (Investopedia, 2017-I):

- “Replacement decisions to maintain the business
- Existing product or market expansion
- New products and services
- Regulatory, safety and environmental
- Other, including pet projects or difficult-to-evaluate projects”
- Therefore, an analysis should focus on the following aspects:
- Net Present Value (NPV)
- Internal Rate of Return (IRR)
- Total size of the investment
- Customer demographics”

NPV. Tesla exhibits a strongly negative NPV. It clearly demonstrates that Tesla currently

NPV stands for Net Present Value. It is determined through the difference in the present value of cash inflow and outflow (Investopedia, 2017-II). It is used to measure the profitability for an envisioned project or future asset. Therefore, a positive NPV indicates a profitable endeavor, as the potential earnings would be greater than the anticipated cost (Investopedia, 2017-I).

The current for Tesla is -$83,182 Mio. USD. This demonstrates that the incoming cash flow is unable to amortize the outgoing cashflow. It seems necessary for Tesla to completely change the spending structure.

IRR. The Internal Rate of Return (IRR) is another indicator for the profitability of an investment. Here the NPV is equalized to zero (Investopedia, 2017-III). Similar to other indicators, the higher the IRR is, the more desirable an investment is to be considered.

Brand Identity. Tesla demonstrates a very strong brand Identity (Alsin, 2017).

A brand is a distinguishing attribute (name, symbol, etc.) “intended to identify the goods or services of either one seller or a group of sellers, and to differentiate those goods or services from those of competitors” (Ghodeswar, 2008). Thus, to be differentiated from other competitors a singular brand identity has to be established and maintained. A brand identity in this sense is a “unique set of brand associations” (ibid). These associations are linked to the offered product or service and imply a certain “promise” to the customer. This customer links the product to this favorable aspect. To achieve this, clothing marketing utilizes celebrities, marketing schemes and market research (ibid). Essentially, a brand has to undergo a certain process that is illustrated in the PCDL model (ibid): Positioning the brand; communicating the brand message; delivering the brand performance; leveraging the brand equity.

Tesla is well recognized within the market and public perception favors the company (Alsin, 2017).

Ratio analysis

The following analysis will comprise of different ratios addressed in the financial statement of Tesla.

Working capital ratio

Tesla exhibits an insufficient working capital. The four-year-tendency, indicates not only that the excess assets are not invested sufficiently, but also that the situation worsens steadily.

Working capital is vital for a corporation’s short-term health and efficiency (Investopedia IV, 2017). The working capital ratio (Current Assets/Current Liabilities) is used to calculate this financial health (ibid) by focusing on the short-term assets and the short-term debt. Results that are lower than 1 indicates negative working capital. Results over 2 indicate “that the company is not investing excess assets” (ibid). Subsequently, a ratio “between 1.2 and 2.0” is considered sufficient (ibid).

As Tesla’s working capital decreased steadily. Here, the development has to be closely monitored and excess assets should be invested in accordance with a stringent investment plan.

Working capital turnover

Working capital turnover of Tesla is currently insufficient. However, the outlook indicates that the working capital turnover will steadily increase over the next five-year period.

The working capital turnover ratio focuses on the relationship between the “depletion of working capital” and the sales revenues (Investopedia, 2017-V). The “depletion of working capital” encompasses the funding of operations and the purchase inventory. These expenses are linked to the sales revenue. A high result indicates that a company is self-sufficient and does not need additional funding due to a steady cash inflow and output. Commonly a high result does coincide with an advantageous position within the market (ibid).

Currently, Tesla demonstrates a negative working capital turnover of – 2.2. Thus, Tesla has a insufficiently efficient short-term working capital. The working capital is currently not sufficiently used in the relation of depletion of working capital and sales revenue over time. However, Tesla exhibits a tendency to increase its working capital turnover gradually. However, the projection until 2021 still indicates a negative result (-0.3). Here, the organizational efficiency should be increase. Only then, a sufficient working capital turnover can be ensured.

Quick Ratio

Tesla exhibits a mildly positive result of the quick ratio. This result, however, increases positively over the next five-year period.

The quick ratio, a ratio that is also known as the acid-test ratio, falls into the family of liquidity ratios. It indicates in how far the organization in question can comply with its short-term payment obligations or current liabilities with its most liquid assets (Investopedia, 2016-VI; 2016-VII). Therefore, it focuses on the most liquid assets: cash, short-term investments and accounts receivable. It is to be noted that the inventory is left out, as it is the most difficult to liquidate on the market (AAII, 2011). This leads to the following formula: Quick Ratio = (Cash and equivalents + marketable securities + accounts receivable)) ÷ Current Liabilities (Investopedia, 2016-I). The result should be “1” or higher (AAII, 2011). It has to be noted that due to the addition of most liquid assets, the Quick Ratio might lead to a “false positive”. This is especially true, if a company has accounts receivable that are due for payment in large quantities, but has as the same time high business expenses and accounts due for immediate payments. Therefore, the Quick Ratio is (just) a valid indicator for liquidity. Companies can use it to analyze its liquidity and within a comparative analysis identify the difference in strength in compared companies.

Tesla demonstrates a positive result for the quick ratio (0.4). Additionally, the tendency indicates that the liquidity will increase over the next five year in a very positive manor. The projection indicates that already in 2018 the liquidity will reach a result of 1.3, in 2021 a result of 2.8 even.

Profit margin

Tesla exhibits an increase of the profit margin over the next five years. In 2021 the level will, however, still not be positive (-3%).

The profit margin is similar to the operating margin. The profit margin ratio is part of the family of Profitability Ratios. As such focuses on a company’s net income. To calculate it, it has to be divided by its equity. This ratio uncovers the ability of the organization in question to generate profits through the use of its equity (Investopedia, 2017-VIII). As part of the profitability ratios it is of most interest to potential creditors and investors. Companies that can produce high profit margins are more likely to be funded and supported (ibid).

Tesla’s profit margin seems to increase drastically (from -33% in 2016 to -3% in 2021). The increase indicates an increase in liquidity for fixed cost. Here, the spending policy should be monitored closely and adapted to further increase the profitability.

Total asset turnover

Tesla demonstrates an only slightly changing total asset turnover ratio.

The Total Asset Turnover is part of the family of the Asset Management Ratios. As such focuses on an organization’s / company’s / firm’s total sales. The amount of total sales is then divided by its total assets. In doing so, it essentially measures the rate of efficiency of a firm I regards of the uses its assets (Investopedia, 2016-IX). The most effective use of this ratio is in comparative industry analysis. While its inefficiency in factoring in the timeline of asset management (differences over years), it still provides a foundation for comparing companies within the same industries (ibid).

The projection indicates that the turnover rate will decrease in the next two years by 0.1 (result: 0.4 in 2017 and 2018) and then gradually increase by 0.2 (result: 0.6 in 2021). The turnover rate should be either hold steady or should be increased.

Fixed asset turnover ratio

Tesla did increase its fixed asset turnover ratio over the last years up to 0.7. However, the tendency of increasing results will – according to the projection – only lead to a result of 1.2 in 2021.

The fixed-asset turnover ratio is a measurement for the operational performance of a company. It focuses on the ability “to generate net sales from fixed-asset investments” (Investopedia, 2017-X). A high result indicates effectiveness in the utilization of fixed assets. However, the result should be analyzed in the industry environment.

While Tesla increased, and is about to increase its fixed-asset turnover ratio, it is still significantly low. Tesla needs significantly increase its effectiveness.

Further observations – Competitor Analysis

Tesla operates in a highly competitive market: The electric vehicle market. As such, a competitor analysis is beneficial for any future investment decisions.

Barriers to Entry

High capital investment and economies of scale pose fundamental barriers for entry and limit entrants into the market. The electric vehicle industry is characterized by high entry barriers. These are established by high capital requirement, large economies of scale, and ultimately the high costs of switching batteries (Ferran &Mosk, 2012).

The continuous investment in development and manufacture of battery technologies, as well as new, more efficient or cheaper materials is necessary to maintain market share. Furthermore, the ability to produce at a lower cost per unit, is vital. Ultimately the maintenance and switching of batteries is the focal point. It is costly. The batteries are customized in design, performance, and safety. Thus, the switching is costly and not attractive for potential buyers. Ultimately, only large corporations are able to exhibit the necessary features to maintain market share. The probability of new entrants providing a threat is very low.

Bargaining Power of Buyers

Buyers are influenced by similar mindset. The target group of Tesla Motor Inc. consists on average of younger, wealthier men (LeBeau 2013). The unique selling point to this customer base is a similar mindset. On the one hand the buyers are attracted by the innovative design and technology. This directly relates to the position and reception of Elon Musk as one of the most innovative minds (Rutter,2014). Furthermore, the economic dimension of driving an eco-friendly vehicle that potentially helps decrease the CO2 emissions is of vital importance (ibid).

Bargaining Power of Suppliers

Supplier power reduced to medium bargaining power through the need of diversification. Suppliers of raw materials and cathode materials, especially lithium-ion cell materials, are impacted by the decline of sales in the mobile market. They are confronted with a need for diversification and other materials. Thus, the leading suppliers themselves are engaged in competitive pricing. Even so, they directly impact the performance and price of electric vehicle batteries (Kim, 2014).

[...]

Excerpt out of 31 pages

Details

Title
Sensitive Analysis of Tesla Motors, Inc.
College
Post University
Course
Financial Modeling
Grade
1,3
Author
Year
2017
Pages
31
Catalog Number
V370786
ISBN (eBook)
9783668487178
ISBN (Book)
9783668487185
File size
680 KB
Language
English
Tags
Finance, Sensitivitätsanalyse, sensitive analysis, tesla, financial modeling, balance sheet, income statement, cash flow, ratio
Quote paper
Jan Alexander Linxweiler (Author), 2017, Sensitive Analysis of Tesla Motors, Inc., Munich, GRIN Verlag, https://www.grin.com/document/370786

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