Financial Analysis of Tesla Motors - Research Paper Example

 Tesla Motor, Inc Financial Analysis and Comparison with Ford Motor Company 0 Introduction This present research paper is based on a scenario whereby there are two possible options that an investor can exploit: of which it is either to invest in Tesla Motors, Inc or Ford Motor Company. Tesla Motors, Inc is the primary option and therefore, the report will seek to evaluate its viability from the standpoint of both its fixed income securities and equities. Therefore, the research intends to explore whether investing in Tesla Motors Inc is a wise decision or whether investing in Ford Motors presents more advantage than investing in Tesla Motors Inc. The analysis will begin with a brief background preview of Tesla Motors. Secondly, the company will do a comparison of Tesla Motors with Ford Motors, and even the automobile industry. Thirdly, the research will analyze the automobile industry, followed by an analysis of the company’s position within the industry context, and fifthly the current state of financial health of Tesla Motors. The last section before the conclusion and recommendation will discuss the trends in the financial health of Tesla Motors over recent years and potentially into the future. 2.0 Tesla Motors, Inc Tesla Motors, Inc is an automobile company, which was established in the year 2003. The company headquarters is located at Palo Alto, California, in the United States. The company specializes in the design, manufacture, and sale of electric cars and electric vehicle power train components. The Tesla Motors, Inc is presently listed in the National Association of Securities Dealers Automated Quotations (NASDAQ). Apart from private investors the Toyota Group, which has a 10% stake in the company and the Daimler Ag, which has a 4.7% stake in the company, also own the company (Krippendorff, 2011). One of the most revered products produced by the company is the Tesla Roadster, which was the first fully electric sports car that it produced, followed by the Model S, which is a fully electric luxury sedan. Additionally, the company is also revered for the production of electric power train components such as the lithium-ion battery packs that are normally sold to other automakers such as the Toyota Motor Company and the Daimler Motor Company, which is the manufacturer of the Mercedes Benz brands (Krippendorff, 2011). It is noted that despite being in operation since the year 2003, the company was only able to post its first profits, which was $11.2 million US dollars in the first quarter of 2013. According to the company’s Chief Executive Officer, its plan for the future is to become an independent automaker with the capability of mass-production of electric cars at reasonable prices that would be convenient for average consumers (Carlson, 2013). 3.0 Comparison of Tesla Motor Inc with Ford Motor Company, and the automobile industry Both Tesla Motor, Inc and Ford Motor Company bear similarities on the fact that they are both American automobile manufacturers and they equally design, manufacture, and sell electric cars. However, Tesla Motor, Inc mainly specialize in the production of electric cars and electric vehicle and power train components, which means that it is only caters for a niche market that is only composed of those consumers who do not prefer using automobiles that use fuel. Moreover, because of the fact that Tesla’s automobiles have to be charged it means that they can only be used in a few selected areas. This alludes to the fact that they cannot be conveniently used in areas where there is no power supply; the power supply is unreliable, or the voltage of power supply is too little to charge an electric car. As for Ford Motor Company, Foster (2013) wrote that they have been in business for 110 years since it was established in 1903 and this means that it has wide participation in the global automobile industry. To affirmed this statement, Hoffman (2013) wrote that Ford Motor Company is the 2nd largest automobile company in the U.S and 5th largest in the world based on comprise of the Tesla Raodster, Model S, and Model X. The Ford Motor Company has a widely diversified product portfolio that consist of a variety of luxury and commercial vehicles, which even include an electric car (Ford Focus Electric) that has continually being produced ever since the year 2011. In addition, Ford Motor Company also offers a variety of services that include automotive finance, vehicle services, and leasing. Ford Motor Company long existence in the industry and the diversified product and service portfolio enables it to generate huge amounts of profits. For example, in the financial year of 2013 it was able to generate US $ 5.664 billion profits ( Hoffman, 2013). However, Tesla Motors, Inc on the other hand is a new entrant into the automobile industry and therefore, it re-injects most of its earning to market expansion programs and more precisely to the development of additional supercharger stations across the markets it intends to sell its cars. This has contributed to the company making continuous losses since its inception in 2003. For example, in the past financial year of 2012 it posted a loss of US$ 396.2 million (Carlson, 2013). In comparison to the industry, it is noted that Tesla Motors, Inc has focused on a rather small niche within the industry that presently has no stiff competition. Nevertheless, it is expected that with increase in demand for electric cars more so from environmentally conscious consumers, other well-establish automobile manufacturers will start the production of electric cars in large numbers (Maxton and John, 2004). 4.0 Analysis of the automobile industry According to Domansky (2006), the automobile industry has witnessed a continued growth in the recent decades, which is largely attributed to the wide diversification of the products or the production of different variety of cars that suit different consumer needs. Domansky (2006) stated that in the past decades, cars and more so those that were designed for personal use were considered a preserve for the rich/ wealthy individuals. However, this trend ended when various automobile manufacturers started manufacturing low-end vehicles and in this regard it is noted that the cheapest brand new cars are presently been manufactured by India’s Tata Motors Company under the brand name Tata Nano. Therefore, it can be stated that the present automobile manufacturers have gained strength by exploiting a market opportunity that was previously untapped and therefore, wading off competition from the second-hand motor vehicle dealers. Despite the gained strength the automobile manufacturers still faces stiff threat from second-hand motor vehicle mostly those who are located in developing countries where only a small percentage of the population are able to afford brand new cars. In addition, Foster (2013) noted that the development of other modes of transport such as the high speed trains pose a threat to the demand of automobile since consumers would prefer to commute using such trains since they are faster; they do not encounter traffic jams, and cost of movement is cheaper. With reference to the writings by Richardson et al. (2011), they stated that presently the automobile industry is facing immense pressure from various quarters to manufacture cars that are environmentally friendly in the sense that they have low carbon emissions. This external pressure necessitated the emergence of electric cars, which are considered environmentally friendly since they do not use any fuel and hence carbon emission is kept at a minimal level. Lastly, it is noted that the automobile industry is also usually affected by economic cycles whereby during low times or depression there is usually low demand for cars, more so, for personal cars that are normally considered luxury and hence they can be avoided in times of poor economic condition. 5.0 The position of Tesla Motors Company Presently, Tesla Motor, Inc is the only company that specializes in the design, manufacture, and sale of electric cars only, which means that it has the advantage of specialization. However, this has not been able to give it an outright competitive advantage in the market or the leading position in the electric car sectors since other well-established players such as the Ford Motors Company also engage in the design, manufacture, and sale of electrical cars. For example, besides Tesla’s brands of electric cars other existing brands of electric cars include the Mistubishi I MiEV, Nissan Leafm Renault Fluence Z. E. BMW ActiveE, Honda Fit EV, RAV4 EV second generation, Renault Zoe, and Volkswagen e-UP, among others (Domansky, 2006). Therefore, it is out rightly clear that Tesla Motors Company still faces stiff competition from other renowned brands that have been in the industry for long and their models that use fuel enable customers to have confidence in their electric car models/ versions (Boudette and Terlep, 2010). For example, customers will easily relate with Ford Focus Electric and even develop an immediate confidence on the model because of long standing reputation of the company in the industry. In addition, the Ford Motors Company finds it easier and less costly to advertise their electric cars since they bungle them together in adverts with even the fuel guzzlers. The Tesla Motors, Inc does not enjoy such an economies of scales based on its marketing function and therefore, its is forced to incur huge cost to first promote the Tesla brand. With increased demand of electric cars, other well-established players are bound to heighten the competition and they will be at an advantaged position since they already have massive financial resources as well as the already available infrastructures, which they will use to roll out a large-scale production of electric cars. In this regard, it is important to note that the Toyota Group and Daimler AG, which are renowned and successful players in the global automobile industry, also have a shareholding in Tesla Motors, Inc. Therefore, through this strategic partnership, Tesla Motors, Inc will be able to access critical resources such as finance, human capital, and infrastructure, which can be used for aggressive expansion, product development, and marketing. 6.0 Current state of the Tesla Motors, Inc financial health 6.1 Liquidity Formula Calculation Ratio Liquid assets/ current liabilities 524,768/ 539, 108 0.97 According to Fridson and Alvarez (2011), liquidity ratios normally indicate the extent to which a business can repay its shot-term liabilities without causing any major disruptions within the company. The desirable or suitable liquidity ratio is 1:1. The liquidity ratio of Tesla Motor, Inc in the financial year of 2012 was 0.97, which is below the desirable level and hence indicating that the company might face possible problems in repaying its short-term liabilities. 6.2 Asset utilization Formula Calculation Ratio Revenue/ assets*100 413256/1,114,190*100 37.1% With reference to the writings by Fridson and Alvarez (2011), it is noted that the asset utilization ratio normally indicates the amount of sales that has been generated for every dollar’s worth of assets. It is further noted that this ratio is very important for companies that are growing such as Tesla Motors, Inc since it determines whether revenue is growing in equal measures with the company assets. From a ratio of 37.1%, it can be indicated that Tesla Motor, Inc is not fully utilizing its present assets to generate more revenue. 6.3 Leverage Formula Calculation Ratio Total debt/ total equity 477,506/ 1114,190*100 42.86 The leverage ratio indicates the extent to which a company is financed by outside finance. This ratio also tells the possible interest burden that the company could be experiencing or the extent of loan repayments that it has to be making on a regular basis. According to Fridson, M. and Alvarez, F. (2011)., a desirable leverage ratio is usually less than 25% therefore, it is correct to state that at the present moment Tesla Motor, Inc is relying on too much external funds, which creates high liabilities for the company. 6.4 Profitability Formula Calculation Ratio Net loss/ sales 396, 213/ 413,256*100 -95.88% This ratio indicates that the company made a loss of 95.88%, which is very alarming and very discouraging to potential investors as it signals low prospects for the company. 6.5 Cash flow In 2010, the cash and cash equivalents at the end of 2010 was US $ 99,558,000, in 2011, this figure rose to US $ 255,266,000, but it declined in 2012 to US$ 201,890,000, this was a 20 percent decline from the previous year. This decreased was attributed to a decrease in the cash from financing activities, which could be attributed to the high repayments of borrowed capital that is used for expansion program ( Ittelson. 2009). 6.6 Market based ratio Formula Calculation Ratio Price per share/ Earning per share 140.17/3.69 37.98 The market-based ratio of Price-Earning indicates how much investors are willing to pay per dollar of current earnings. From a ratio of 37.98 it means that, investors are not willing to pay a high price to own a piece of the company perhaps because it has not yet becomes stable and consistent in posting profitability (Ittelson, 2009). 7.0 Trends in the financial health of Tesla Motor, Inc over recent years and potentially into the future From the company’s financial statements it is noted that its revenue has been on a steady increase since the year 2010 making its peak in 2012, where the revenue generated was US$ 413, 256,000 while the previous year in 2011 it was US$ 204,242,000, and this indicated more than 100% increase in revenue. However, despite the increased revenue, the company has been posting an increase in net losses. For example in 2011 it made a net loss of US$ 254,411,000 and in 2012 this figure jumped to 396, 213,000. With reference to the writings by Ittelson (2009), it can be stated that the increase in revenue but consistent positing is because of high amount of liabilities, which has contributed to the company presently having undesirable leverage level. 8.0 Conclusion Based on the analysis that was conducted it was noted that Tesla Motor, Inc focuses on a very small market niche that has numerous barriers for growth. Compared to Ford Motor Company, it is noted that Tesla Motor, Inc is at a disadvantageous position within the industry since it focuses on a market niche that is yet to be fully develop. This is despite the fact that other well-established automobile manufacturers are still penetrating into the electric car sector thereby presenting major competition to the company, which is still on a growing path. Additionally, from the diagnosis of the financial health of the company it was noted that presently the company does not have a sound financial health because of consistently positing losses, undesirable profit levels, and high reliance on external finance. Additionally, it was noted that the company has low utilization of company assets, low cash flows, and even the fact that investors will not be willing to pay top dollar for the company. However, it was noted from the analysis that external forces that are pressuring the industry players to manufacture cars that are eco-friendly favor the company and with the continued sensitization of global warming and climate change it is expected that there will be a sharp increase in the demand for electric cars. 9.0 Recommendation Based on the analysis that was conducted above, it is wise to advise the prospective investors to avoid investing in the company’s fixed income securities and even its equities. This is majorly because the investor is not likely to get any substantial return from the company with the short-term since it is at disadvantageous position within the industry. Secondly, it has been performing poorly in terms of financial performance and thirdly, because of the fact that other well-established automobile are already producing electric cars it means that it is bound to face stiffer competition in the future, which will diminishes its prospects of future growth. The willing investor can however, invest in the fixed income securities and equities of Ford Motor Company since this is a highly reputable company in automobile industry that has a sound financial health with wide product diversification, and hence it will offer good returns to the prospective investor. References Boudette, N and Terlep, S (2010). "Auto-Sales Optimism Fades". The Wall Street Journal. Retrieved from: http://archive.is/HySAo. Accessed on [06.07.2013] Carlson, B. (2013). Tesla: Inventor of the Electrical Age. Princeton University Press Domansky, L. (2006). Automobile Industry: Current Issues. New York, U.S: Nova Publishers Foster, P (2013) American Motors Corporation: The Rise and Fall of America's Last Independent Automaker . U.S: Motorbooks Publications Fridson, M. and Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. Hoboken, NJ: Wiley Publisher Hoffman, B. ( 2013) American Icon: Alan Mulally and the Fight to Save Ford Motor Company. New York, U.S: Crown Business Ittelson. T. (2009) Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. New Jersey, U.S: Career Press, Incorporated, Krippendorff, K. (2011). Outthink the Competition: How a New Generation of Strategists Sees Options Others Ignore. Hoboken, NJ: John Wiley & Sons,   Maxton, P. and John W, (2004) Time for a Model Change: Re-engineering the Global Automotive Industry. Cambridge , UK: Cambridge University Press Richardson, K. Steffen, W. and Liverman, D. (2011). Climate Change: Global Risks, Challenges and Decisions. Cambridge, UK: Cambridge University Press Read More