Invest in Tesla: A Lucrative Opportunity for Investors - Research Paper

Introduction

Tesla is an American multinational company that trades in the automotive and energy industry. Since its establishment in 2003, the company has continuously specialized in the manufacture of electric cars (Tesla, 2019). The organization, as well, has been manufacturing Lithium-ion batteries and solar panels. Like any other corporation, investing in the financial securities of Tesla offers an opportunity to earn income in the form of dividends and capital gains. However, investors ought to assess the level of business risk at Tesla besides its financial performance since these factors determine capital gains and dividend payments. Investors, in this regard, may forego dividends if a company makes a loss. Also, there would be no capital gains if the value of assets falls below its face value. Ratios analysis, among other financial tools, helps investors understand the relationship between line items in standard financial statements.

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Financial Ratios

Current Ratio (CR)

CR measures the liquidity position of an organization from a perspective of its ability to pay near-term debts.

CR = Current assets

Current liabilities

2019; $12.1B/10.67B = 1.134

2018; $8.31B/9.99B = 0.831

2017; $6.57B/7.67B = 0.856

Return on Equity (ROE)

This metric is a form of a profitability ratio that predicts that ability of a company to utilize its equity investments to generate profits.

ROE = Net income

Shareholder equity

2019; $0.862B/6.62B = 0.130 or 13%

2018; $0.9761/4.92B = 0.198 or 19.8%

2017; $1.96/4.24B = 0.462 or 46.2%

Debt-to-Equity Ratio (DER)

This element measures the proportion of an organization's total liabilities to shareholders' wealth.

DER = Liabilities

Stockholders' equity

2019; $26.2B/6.62B = 3.95

2018; $23.43B/4.92B = 4.76

2017; $23.02B/4.24B = 5.42

Net Profit Margin (NPM)

The metric of this profitability ratio predicts earnings that a business can extract from its sales.

NPM = Net profits x 100

Net sales

2019; ($0.862B/6.22B) x 100 = 13.85%

2018; ($0.9761/5.94B) x 100 = 16.43%

2017; ($1.96B/3.85) x 100 = 50.90%

Return on Assets (ROA)

This financial ratio facilitates an assessment of manager's efficiency to use assets available at their disposal to maximize earnings.

ROA = Net income

Total assets

2019; $0.862B/34.31B = 0.0251 or 2.51%

2018; $0.9761/29.74B = 0.0328 or 3.28%

2017; $1.96/28.66B = 0.0683 or 6.83%

Profitability Trend and Analysis of Financial Ratios

2019 2018 2017 2016

Sales/Revenue ($) 24.58B 21.46B 11.76B 7B

Cost of Revenue ($) 20.51B 17.42B 9.54B 5.45B

% of COGS to Sales 83.44% 81.17% 81.12% 77.85%

Net Income/Loss ($) -862M -976.09M -1.96B -674.91M

Tesla Inc. has consistently recorded a loss for the last four years, although its revenue has been increasing over the same period. The gross income of the company, as well, has steadily increased for the past few years. In 2016, for instance, Tesla recorded a gross income of $1.55B, which increased to $4.07B in 2019 (Tesla, 2019). This figure translates to an increase of 162% from the year 2016 to 2019. From the relationship between the company's gross profits, net incomes, and the Cost of Goods Sold (COGD), it is evident that Tesla Inc. incurs significant expenses to generate its income. In 2019, for instance, Tesla's proportion of COGS to sales was 83.44% (see table 1). This aspect suggests that the cost of generating revenue for that year consumed 83.44% of the total sales. So, the company has been making a loss because it has significant operating expenses. Although Tesla's NPM ratio has been falling, it is still high, and it shows that the electric-car maker cannot control its costs effectively. The cost of revenue has also been increasing steadily. In 2019, the company started manufacturing new car models, leading to 17% unit growth from 2018 (Grant, 2020). This investment strategy, as well, explains a negative financial performance at Tesla (Grant, 2020).

Some of the income statement items that consume a significant proportion of the organization's annual revenue include salaries, general and administrative expenses. This phenomenon explains why Tesla's profits have been falling, yet sales have been increasing consistently. In terms of liquidity, however, Tesla can service its short term debts. The electric car maker had a current ratio of 1.134 in the year 2019, suggesting that its liquid assets can cover current liabilities. While Tesla's liquidity position has not been stable for the last three years, the metrics of the current ratio suggests that the firm can meet its maturing financial obligations. The current ratio being favorable means investors and creditors, to some extent, are confident that the electric car manufacturer can easily pay its current debts.

Other financial metrics of great importance to the investors are debt-to-equity ratios, ROE, ROA, and net profit margin. Tesla has a high gearing ratio, although the proportion of its liabilities to shareholders' equity dropped from 5.42 in the year 2017 to 3.95 in 2019, respectively. This aspect suggests that Tesla gets more of its financing by borrowing money. While it prefers debt over equity financing, the three-year trend shows that the company has been shifting from borrowing money to issuing equity shares. In 2020, total liabilities were 3.95 times that value of shareholder's equity, meaning the level of risk at Tesla is still high.

The metrics of ROA, net profit margin and ROA are not favorable to investors since the company has been posting negative profits. Although ROA and ROE are negative values, they suggest that the car-manufacturer has been improving in using the existing assets to maximize its earnings. More importantly, the fact that the ROE of Tesla is negative implies that shareholders have been losing value. Negative ROA also means the company loses more money than what it is gaining by using the existing assets. The company's Earnings per Share (EPS) is also negative. In this regard, Tesla Inc. had basic EPS of -5.72 and -4.87 in the year 2018 and 2019, respectively (Tesla, 2019). Investors, thus, lost $4.87 per share of outstanding stock in 2019.

Tesla has several strengths the make it a potentially rewarding investment in the future. This corporation is the leading manufacturer of electric automobiles in the US and has been investing in clean energy through innovative practices. Investors, therefore, are confident that Tesla can develop profitable and competitive products, which, in turn, would result in higher financial gains in the future. The company has also been diversifying its business portfolio. Recently, it partnered with Liberty Mutual to establish Insure-My Tesla Insurance. Although financial experts have said that the demand for Tesla products has been collapsing in China, Europe, and the USA, it still leads the industry (Caval, 2020). One of the weaknesses, however, is the low production of electric vehicles. Again, it faces threats like aggressive competition from Hybrid, among other alternative fuel automobiles. In the future, Tesla Inc. could experience stiff competition from car-manufacturers that have embraced self-driving technology.

Conclusion and Recommendations

Long-term investors should buy the stock today as Tesla has improving margins in terms of sales, EPS, ROE, ROA, NPM, and gearing ratio. This trend shows that the company is properly managed, and the prospects for growth are high. Hence, buying the stock today is a way to maximize long-term investments. Notably, costs have been growing since Tesla has been launching new products. This aspect provides more opportunities for long-term investors. Short-term investors, on the other hand, should sell their stock today and invest their resources in other investment options. The reason is that Tesla has unfavorable EPS, and its investments are long-term in nature, suggesting that it will take more time to yield positive returns. Also, it is the best time for these investors to sell their assets today since they are attractive to long-term investors.

References

Caval, V. (2020, January 29). Tesla will have a disaster year in 2020: Analyst. https://finance.yahoo.com/news/tesla-elonmusk-musk-bull-bear-earnings-223112774.html

Grant, C. (2020, January 1). Can Tesla hold its charge? https://www.wsj.com/articles/can-tesla-hold-its-charge-11577892780Tesla. (2019, December 31). Annual report for 2019. https://www.sec.gov/Archives/edgar/data/1318605/000156459020004475/tsla-10k_20191231.htm