Business Performance Analysis: The Sase of Tesla Inc

Paper Type:  Case study
Pages:  7
Wordcount:  1825 Words
Date:  2022-04-04


Tesla's performance on paper may not be enviable, but the company is performing well enough to be a going concern. In fact, going by the trends indicated in the financial statements, it may be a company whose shares would be worth investing in, especially for the long term. In the three years ending 2013, for example, the revenues have doubled with each successive financial period, a trend which has not been observed in any other company in any industry. It trend can be attributed to many factors, a major one being the release of its new products (Steen, 2015). The sales in the first half of 2013 were boosted by the sales of the newly unveiled model S. Tesla is currently at a position in which its future progress is promising, and current operations are speculative of It future. It has a competitive edge over other companies and is consistent in its growth which indicates that in spite of having made net losses in the three years ending 2012, it is performing well (Linxweiler, 2017).

Tesla seems to be growing steadily in all aspects. It has not reached profitability as yet, but its growth curve is promising and indicates that the company is fast increasing in size. The revenues of the company seem to be growing at a consistent rate each year since 2010 (Steen, 2015). However, the company's attempts to minimize costs and expenses do not have a significant effect on the financial statements as the organization's negative net income has increased steadily over the same period, albeit at a slower rate than the increase in revenue. Of concern are the additional income and expense items, which seem to be fluctuating wildly. The company should focus on controlling these unspecified expenses/incomes (Wahlen et al., 2017). The company should also reduce the research and development and sales, general and administrative costs because currently, the increase in these costs negate the effect of the increased revenues registered.

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There is a distinct gap between Tesla's desired and current performance. At the stage at which the company is operating, its products have mainly been under development (Linxweiler, 2017), and the company has invested heavily in research with the aim of being market leaders in the production of electric vehicles. So far, the company has achieved It goal, but some of its products, such as the Model 3, the Tesla semi and the Roadster 2020 have not yet been mass produced yet. Tesla is the market leader in electric vehicle technology, with the advanced batteries and charge retention technologies beating those of their competitors (Steen, 2015). Once these models are mass produced, they are expected to capture the market with as much, or more, intensity as the already available models, which would dramatically increase the company's revenues thereby leading to a break even. At It point, the research and development costs will have paid off.

Tesla's financial performance is headed in the right direction. Tesla has made substantial investments in fixed assets in the last seven fiscal periods, a move that is geared towards reducing production costs without compromising on quality by increasing production efficiency. It can be reflected in the increased debt and increased interest expense (Steen, 2015). However, the company's ability to use its assets to generate revenue is evident through its asset turnover ratios. The increase in efficiency will reflect further when the upcoming models are finally mass produced. The organization is visibly working using a long-term trajectory whereby management favors massive current investment for future gain. The quick and current ratios of the company also indicate a favorable liquidity position (Linxweiler, 2017), with inventories making up a significant portion of the current assets. All profitability ratios except the gross margin are in the negative and as at 2016 indicated positive progress towards profitability.

ROCE=EBIT/Capital employed


Sales/capital employed


SG&A/sales Tesla: 0.205

Inventory Turnover Tesla: 2.612

Cash Turnover Tesla:2.34

PPE turnover Tesla: 0.768

Debt:Assets Tesla:0.79

Depreciation/sales Tesla: 0.149

Payables Turnover Ratio Tesla: 2.2

R&D/sales Tesla: 0.119

Return on sales


Tesla's EBIT margin was 0.0575, 0.187, and 0.0782 in the years 2014, 2015 and 2016 respectively (Tesla, 2018). These figures are all on the negative, and therefore depict deterioration in the margin. Between 2015 and 2016 the change in the ration was caused by a sharp decrease in the earnings before interest and tax (Wahlen et al., 2017). In 2015, Tesla had additional general expenses of $40.14 million before interest and tax. However, It situation was reversed in the next financial period with the company registering other incomes of $119.8 million. These figures had a significant effect on the EBIT margin trends indicated. These margins are unfavorable as they are undesirable. Positive margins would show that the company is generating income not making losses like Tesla is.

The fact that the company's balance sheets indicate that the company has been making net losses renders all profitability ratios negative. Profitability ratios at It point can only help in determining how close the company is to breaking even and becoming profitable (Linxweiler, 2017). At It point, any indication of a reduction in the company's net losses would signify positive progress. Such progress can be seen in the year ending 31/12/2016 whereby the net losses made had reduced to $674.9 million from 888.67 million made the previous period.

The return on assets (ROA) ratio currently indicates that Tesla is not correctly utilizing its assets to generate profits (Wahlen et al., 2017). The net losses are increasing as the total assets of the company increase. However, these ratios do not always show the whole picture and should not be interpreted at face value because they may mislead the user of the financial statements. In It case, for instance, the long-term debt seems to increase as the assets increase. It debt attracts interest expense which takes up a significant portion of the losses reported.

The inventory turnover ratios for 2014, 2015, and 2016 were 2.43, 2.44, and 2.61 respectively. It is a generally positive trend because it indicates faster conversion of inventory into cash. It, in turn, leads to increased revenues for the company (Linxweiler, 2017). It is proof of increased efficiency in Tesla's operations. It increased turnover ratio correlates with Tesla's marketing strategy in which the sales and marketing team was paid a salary. It breeds highly motivated workers who are efficient and effective. Dealers were also eliminated, and the company sells its vehicles in its own branded stores.

Tesla's ability to utilize its assets in the creation of profits can also be measured using the total asset turnover. In 2014, 2015 and 2016, the total asset turnover was 0.549, 0.501 and 0.309 (Tesla, 2018). It, in effect, indicates the deterioration of Tesla's ability to utilize its assets. It trend was caused by the high rate in which Tesla's total assets increased in comparison to the increase in sales. The revenue increases have not been proportional to the increases in assets.

The payables turnover ratio indicates how long Tesla takes to pay their suppliers. It was 3.055, 3.022, and 2.28 in 2014, 2015 and 2016 respectively. It ratio suggests that Tesla is taking increasingly longer to pay their suppliers for any purchases made. It may be a sign that the financial position of the company is deteriorating (Wahlen et al., 2017). Payments are often made early in cases where early payment attracts a discount. Otherwise, it is advisable for the payables department of the company to take as long as is allowed before finally making the payment. It provides cash to remain at the company's disposal. More often than not, activity ratios use averages of averages of balance sheet items, thus arises an issue of timing whereby it is sometimes difficult to quantify these items especially in the middle of a financial period.

Tesla's debt to equity ratio was 5.4, 6.44 and 3.77 for the years 2014, 2015, and 2016 (Tesla, 2018). Debt mainly finances the company's capital structure. As indicated, the debt exceeds the shareholder's equity. In effect, in 2014, the part of the company's capital structure dependent on debt was 5.4 times that financed by the shareholders' equity. The capital structure ratio indicates the level of leverage that a company has. For instance, Tesla Inc. may be in danger of being unable to obtain debt financing in future if the debt to equity ratio increases further (Linxweiler, 2017). Lenders consider it risky to lend to companies with a high debt to equity ratio because such companies often have a lesser ability to finance the loans.

The debt to asset ratio is computed by dividing the liabilities by the assets. Ideally, a lower debt to asset ratio is suitable for a business, because it shows that the company has fewer obligations, which translates to fewer interest expenses. In the case of Tesla Inc, the debt-to-asset ratios for the three years were 0.844, 0.866, and 0.79 for 2014, 2015 and 2016 respectively. These are all considered favorable as they are less than 1 (Wahlen et al., 2017). However, the interpretation of the debt to assets ratio is based on many other factors, and the ideal ratios are industry and market specific.

The time's interest earned ratio is used to evaluate the ability of a company to finance all loans and pay both principal and interest. It is indicative of how many times the current interest expense goes into the earnings before profit and tax. In the case of Tesla Inc., it has made losses before interest and tax for the three years in question (Steen, 2015). It makes the times earned ratio negative, which is highly undesirable. It indicates that the company does not have enough money to fulfill its interest obligations should they fall due. The earnings before interest and tax and interest expense seem to have an inverse relationship. EBIT decreased sharply from 2014 to 2015 and then increased slightly in 2016 before a dramatic drop one year later (Linxweiler, 2017). The sharp increase in interest from 2015 to 2017 indicates that Tesla increased its debt capital.

The ability of the company to meet short-term obligations is determined using liquidity ratios. The quick ratio compares Tesla's current assets and current liabilities showing a general status of the company. It indicates how easy it would be to liquidate assets to pay off short-term obligations (Wahlen et al., 2017). In 2014, 2015 and 2016, Tesla's current ratios were 1.51, 0.99, and 1.07 respectively (Tesla, 2018). Current ratios are considered favorable if they exceed one. Therefore, in 2015, Tesla's current ratio was unfavorable and indicated that the company could be unable to take care of its short-term obligations since its short-term liabilities exceeded the current assets.

The quick ratio is considered a more accurate version of the current issue. The quick ratio is calculated by dividing the current assets less inventory, by current liabilities. Inventory is eliminated from the current assets since the aim is to evaluate for liquidity, and inventory is sometimes quite illiquid, especially in cases where slow-moving items are involved. Tesla's quick ratios were 1.06, 0.54, and 0.72 for 2014, 2015 and 2016 respectively (Tesla, 2018). From the change in the ratios, it is clear that inventories take up a significant portion of Tesla's current assets. Tesla's quick ratio is weak.

Ratio analysis has its weaknesses and cannot be used as the sole basis on which to decide on whether Tesla Inc. is performing well and is expected to operate well in the l...

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Business Performance Analysis: The Sase of Tesla Inc. (2022, Apr 04). Retrieved from

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