Tesla Balance Sheet Research Paper
Tesla Inc. formerly known as Tesla Motors, Inc. is an American company founded by a group of engineers in the year 2003 with an intention of developing electric vehicles and in the process highlighting that electric or plug in automobiles are the best vehicles and they can be fast and fun to drive as contrasted with the traditional gasoline vehicles (About Tesla). Currently, the company designs, manufactures and sells not only electric cars but also clean products for energy generation and storage which are scalable clean. This is an indication that the company operates through two segments which are inclusive of energy generation and storage and automotive (About Tesla). The company undertakes all its operations with a belief that the sooner the world ceases from relying on fossil energy and focus on the zero-emission future, the better. Tesla Inc is an American automotive and Energy Company listed in NASDAQ stock exchange with its headquarters in Palo Alto, California in the United States (About Tesla).
Industry Sector
Tesla operates in the automobile industry which is among the leading industries in the whole world. It is an industry which plays an important role in developing the global economy as a result of the high revenues it earns and increasing demands from customers. Tesla has various competitors in the United States the major players being Fiat Chrysler Automobiles, Ford and the general motors. There are other minor players who are inclusive Acura, Anteros, Callaway, Fisker, Lyons, and others (About Tesla).
Operating Risks of the Company
Tesla is operating in an industry which is affected by various risks and the major ones being regulation and demand. There are rigorous regulations being put by governments not only from the US but also other countries which are adding more pressure to companies in the automotive industry including Tesla. Another huge problem for companies in the automotive industry including Tesla is consumer demand. Companies are finding it difficult to forecast the types of vehicles and also the precise demand in specific geographies. Other risk affecting the company directly include; the economic risks where any form of recession has a potential impact on the company’s sales, the company is also faced by the reputation risk whereby they are not able to deliver as per the consumers’ expectations and also the competitive risk where there are other companies which are profitable and economically endowed with resources such that they can competitively outdo it.
Financial Risk
Tesla Inc. is facing a big financial risk due to low revenues; the company has not been selling enough units and fast enough to be able to continue funding their operations. There are several reported cases of revenue drop as a result of the reduced sale in various countries. Their cars are also very expensive this factor puts off a good number of customers, thus reducing the market base. All these reasons have reduced the ability for the company to make enough finances to cater for all its operations and pay for its short term obligations, thus, putting it into financial risk.
Does Tesla Have A Preferred Stock?
Yes, Tesla has a preferred stock known as special equity which has characteristics of both debt and equity through in the quarter which ended in Dec 2018, the company had a $0 million preferred stock.
The Capital Structure of Tesla Inc
Tesla like any other company has a capital structure which is aimed and strategized on the various metric through which capital will be raised to finance its activities. In this regard, Tesla relies on both debt and equity to finance its activities noting that in the previous fiscal year, the company registered liabilities that totaled to $24,816,371 and equity totaling to $4,923,243,000 (Tesla’s Form 10-k). The debt consists if both long term and short term whereby the same fiscal year the company registered current liabilities or the short term liabilities amounting to $9,992,136,000 and long term liability amounting to $14,824,235,000 (Tesla, Inc. (TSLA). As denoted above, the company has preferred stock but as of the previous fiscal year, it registered zero million preferred stocks. Nevertheless, its common stock or the shares outstanding which happened to be 172 million as of December 2018 currently is selling at $275.43 (Tesla, Inc. (TSLA).
The Company’s Current Actual Beta
Tesla has a beta value or a value which measures the risk facing it out of the exposure to various market movements. This is the value which measures the volatility or systematic risk of a particular security. Based on Yahoo finance, an evaluation carried out as of March 15 indicated that the firm had a Beta (3Y monthly) of 0.05 (Tesla, Inc. (TSLA). The beta resulted in observed elements where the previous close and opening of the company’s stock amounted to 289.96 and 283.51 respectively. The market cap utilized by then amounted to 47.573 billion (Tesla, Inc. (TSLA).
Tesla’s Current Marginal Tax Rate
The marginal tax rate happens to be a tax rate which is incurred on each extra dollar of income. The marginal tax rate for any person happens to continually increase as his/her income increases. Like any other company, Tesla also pays taxes to the government which they turn used to cater for their expenditures. For a long time, the corporate tax rate for all the auto industries has placed as at 35% applied on the company’s income after expenses have been deducted. Nevertheless, the corporate companies had a relief last year when the marginal tax rate was decreased from 35% to 21% (Tesla, Inc. (TSLA). It is evident that the company is paying considerable marginal tax because in the previous fiscal year or as at December 2018, the company paid income tax of $57,837 which was an increment from the 2017 fiscal year for they had paid $31,546 (Tesla Historical Stock Prices).
The Company’s Cost of Debt before and after Taxes
The cost of debt of a company is defined as the return which a particular corporation is required to provide to its creditors and the debt holders. Whenever a company has creditors who have invested their company, the two parties (creditors and the company) set an agreement wherein they supposed to be paid periodically or using a schedule which is fixed. Based on an analysis carried out by Nasdaq, Tesla Motors’s cost of debt which is the pre-tax is 5.9505% (Tesla, Inc. (TSLA). The corporation has a cost of debt which is equal to the sector median calculated recently. The weighted of debt or the after-tax cost of debt founded as; the cost of debt* (1-tax rate) will be equal to 6.16%.
Or, the cost of debt = 663.071/11143.15 = 5.951%
The Cost of Preferred Cost
As depicted in the analysis above, the company had preferred stock in its earlier years but of later or in the 2018 fiscal year, the preferred stock registered was zero. This is an indication that the price of preferred stock is also zero or does not exist.
The price of common equity is considered to be the required rate of return of the shareholder. To calculate the cost of common equity, one can use the capital asset pricing model or the CAPM which is used to establish the cost attributed to the stakeholder’s equity. It offers the relationship which exists between the expected rate of return and the systematic risk of an asset. Calculating the cost of common equity using the CAPM requires several types of information which include the beta value, the rate of return in the market and also the risk-free rate.
Cost of equity = risk free rate + (beta * [market rate of return – risk free rate])
• The risk-free rate = 2.63
• Risk-free rate of return = 6%
• The company’s beta as depicted above = 0.05
Therefore, the company’s cost of equity = 2.63 + (0.05*0.06) = 2.93
The Weighted Average Cost of Capital of Tesla
The weighted average cost of capital (WACC) is considered as a monetary ration calculated with an aim of estimating the cost of financing and buying assets by the company done by contrasting the debt and equity structure of the entity. Generally, the process is used to measure the debts’ weight and a true value on the cost of borrowing capital or raising cash through equity to finance the company’s operations.
WACC = E / (E + D) * Cost of Equity + D / (E + D) * Cost of Debt * (1 – Tax Rate)
Where WACC – weighted average cost of capital
E –equity
D – Debt
• Shareholder’s equity = $4,923,243,000
• Total debt = $24,816,371,000
• Cost of equity = 2.93%
• Cost of debt = 5.951%
• Tax rate = -3.595%
Therefore, WACC = 4,923,243,000/ (4,923,243,000 + 24,816,371,000) * 2.93% + $24,816,371,000/ (4,923,243,000 + 24,816,371,000) *5.951% * (1—3.595%), which is equal to;
0.1655 *2.93% + 0.834 *5.951% * 4.595 = 0.1655 * 0.0293 + 0.834 *0.05951 * 1.03595, which is equal to;
0.004849 + 0.001806 = 0.006655
How Has Tesla’s Stock been performing In the Last 5 Years?
The entity’s stock for the last five fiscal years has been decreasing but there are several variations which have been observed in the process. Despite that the 2018 stock price is lower as compared to the stock price five years ago, the decline since then is has not been static. The stock price has been rising and falling as a result of the market factors facing the company. A company is stock can be affected by various occurrences which either creates or destroys confidence on the investors, thus, making the stock to change. Recently, the chief financial officer of the company announcement of leaving the company resulted in a drop in the company’s stock price.
In the five years, the company closed their year which ends on 31st December with a stock price of $332.8, $311.35, $213.69, $240.01 and $222.23 for 2018, 2017, 2016, 2015 and 2014 respectively (Tesla, Inc. Stock Report).
The Annual Cash Dividend Yield of the Common Stock
Based on the company’s current operations, the company has not been making a profit for a considerable amount of time. Based on the form 10-k provided by the company, the reported total loss of the company amounted to 976,091, $1,961,400 and $674,914 for 2018, 2017 and 2016 respectively. This is an indication that the company’s shareholders have been facing a net loss per share of common stock amounting to $5.72, $11.83, and $4.68 for the years 2018, 2017 and 2016 respectively.
How would you assess the overall risk structure of the company in terms of its operating risks and financial risk (debt-to-capitalization ratio)?
Before investing in the corporation, it is important to assess its financial and operational risk or its ability to manage the debts and financial leverage. The best way to assess the risks is by using the debt-to-capital ratio. The debt-to-capital ratio happens to be a solvency ratio which is used to measure the proportion of the debt bearing interest and stakeholder’s equity.
Debt capitalization = (short term debt + long term debt)/ (short term debt + long term debt +shareholder’s equity)
• Short term debt = $9,992,136,000
• Long term debt = $14,824,235,000
• Shareholder’s equity = $4,923,243,000
Therefore, debt capitalization ratio = ($9,992,136,000 + $14,824,235,000)/( $9,992,136,000
+ $14,824,235,000 + $4,923,243,000) = 0.83
Would You Invest In This Company?
Tesla is a company in a profitable industry and most of the companies in it are making considerable returns. There are big companies creating more wealth to their shareholders in this industry but this cannot be the determining factor. For the time being, it is not advisable to invest in the company or buy Tesla shares because those who have invested in it are getting marginal returns. It is observable that the company has been making losses over time and investors have not been receiving dividends. Therefore, it would not be advisable to invest in the company for the moment.
References
Tesla, Inc. Stock Report: Nasdaq Stock reports retrieved on 3/17/2019 from, https://www.nasdaq.com/symbol/tsla/stock-report
Tesla, Inc. (TSLA): NasdaqGS – NasdaqGS Real Time Price. Currency in USD. Yahoo finance, retrieved on 3/17/2019 from https://finance.yahoo.com/quote/tsla/key-statistics/
Tesla’s Form 10-k: Annual report on form 10-k for the year ended December 31, 2018. Retrieved on 3/17/2019 from http://ir.tesla.com/sec-filings
Tesla Historical Stock Prices: Nasdaq Historical Prices. Retrieved on 3/17/2019 from https://www.nasdaq.com/symbol/tsla/historical
About Tesla: Tesla’s mission is to accelerate the world’s transition to sustainable energy.
Retrieved on 3/17/2019 from https://www.tesla.com/about
