RunningHead:TESLAFINANCIALANALYSIS

TeslaFinancialAnalysis:MovingMarkets
AnEvaluationby:JamieZoldy,SonyaSondhi,MonicaTham,MaryORourke,&AlexRengifo
MGMT260:PrinciplesofFinance
ProfessorDay


TESLAFINANCIALANALYSIS

TESLAFINANCIALANALYSIS
HistoryofTesla
Startedin2003,TeslasoriginsliewithengineerandentrepreneurMartinEberhard(Hill,
2014).WhenEberhardcouldntfindthecarhewantedonthemarketasportscarthatwas
environmentallyfriendlyhesetouttocreateone.Thefirstprototypethefoundersworkedon,
namedtheRoadster,had400voltsofelectricalpotential,powerfulaccelerationpotential,couldget
220milesonasinglecharge,andcouldbechargedusingthesamekindofoutletthatawashing
machinerequires.By2008productionbeganontheRoadsterandthefirstsevenRoadsters,the
FoundersSerieshittheroadreservationsforthecarbeganpouringin.TeslainvestorElonMusk
thenexpandedhissights,ashewantedtobuildthefirstnewmajorU.S.autocompanyinover80
years,andbegandevelopingalessexpensivecarinordertoincreasedemand.ByJune2012,Tesla
introducedtheModelSwhichwouldrangeinpricefrom$57,400to$77,400andwouldbeableto
lastupto300milespercharge.ByMayof2012Teslahad10,000reservationsforcustomers
hopingtopurchasetheModelS,andbyJunethefirstModelSswerereleased.Muskwantedto
furtherexpandTeslasfleet,anddevelopedasportutilityvehiclethatwouldcost$250millionto
developandwouldgointoproductioninlate2013.
ManagementsDiscussionandAnalysis
TeslacommenceddeliveriesoftheirModelS,itssedan,in2012,andhadsoldaround
57,000ofthemby2014(Tesla10K,2015).TeslaexpandeditsModelSserieswiththeproduction
oftheAllWheelDriveDualMotorModelSwhichbegandeliveryinDecemberof2014.The
companyexpandeditsproductofferingswiththedevelopmentofitsModelXcrossovervehicle
whichwasreleasedinthethirdquarterof2015.TeslaiscurrentlydevelopingitsModel3vehicle


TESLAFINANCIALANALYSIS

whichisdestinedtoenterthemassmarketin2017.TheModelXisexpectedtobesetataretail
priceof$35,000ascomparedtoitsluxuryvehicleswhichrangefrom$57,00$100,000.
Teslaisacompanythatcreatesandsellshighperformancefullyelectricvehicles,electric
powertraincomponentsandenergystorageapplications.Itsprimarysourceofrevenueisreceived
fromthesalesoftheirfullyelectricvehicles.Attheyearendof2014Teslarecognizedatotal
revenueof$3.20billionwhichwasanincrease$1.19billionfrom2013totalrevenueof$2.01
billion.Thegrowthinrevenueexperiencedfrom201314wasaresultintheModelSdeliveriesin
2014.In2013totalgrossmarginwasrecognizedas22.7%andincreasedto27.6%in2014.Dueto
highervehicleproductionandsupplychainefficiencieswhichoffsetthetransitiontoitsfinal
assemblylinecontributedtotheoverallincreaseingrossmarginin2014.Anotherareaof
importancein2014wasinTeslasR&Dexpenseswhichwere$464.7millionwhichisanincrease
from$232millionfor2013.Thisincreaserevolvesaroundtheinnovativeeffortstodevelopthe
ModelX.OverallTeslaexperiencedanincreaseinsaleswhichcanbeattributedtotheexpanded
productionlineandtheenteringofseveralnewinternationalmarkets.TheincreaseinSG&A
administrativeexpensesfrom$255.6millionin2013to$603.7millionin2014isviewedasan
indicatorofprogress.
HorizontalAnalysis
Horizontalanalysisisthecomparisonandanalysisoflineitemsinafinancialstatement
overacertainperiodoftime.Thetrendanalysisoverthepastthreeyearsbetween201214,has
shownTeslasexponentialgrowthprocessoftransitioningfromadevelopingstageofitsproduct
line,toanestablishedcompany.Overtheyears,therehasbeenasteadilyincreaseofthe
totalcost
ofrevenue
.From2012to2013,revenuesincreased306%,andcontinuedtoincreasein2014
another49%,showingthatTeslasreleaseandsalesoftheModelSincreasedrevenueinthesmall


TESLAFINANCIALANALYSIS

market.WhilehavingathenewModelSinthemarketincreasedrevenue,becauseTeslaisa
leaderinelectricautomobiles,thecompanyspendsalargeamountofmoneydedicatedto
research
anddevelopment(R&D)
forfutureproductlines.ThetotalamountofmoneyallocatedtoR&D
fluctuatesduetotheconstantresearchdonetodiscoverandinventnewtechnologies.Between
20132014,expensesincreased100%inlightofresearchingthenewawaitedModel3,thatis
expectedtolaunchin2017.Thefluctuationoccurswhenanewmodelisestablishedandresearch
isconducted.Withsuchhighamountsof
R&D
,thereisalsoahigh
lossfromoperations.
In2012,
Teslahadalossof$394billiondollars,whileinthefollowingyearthedebtdeclinedby95.41%,
downto$61billion,showingthatduringtheyearsTeslainvestalargesumofmoneyin
R&D
,they
areunabletosellenoughcarstominimizethe
lossofoperations.
Theelectricautomobilecompany
hasbeenfallingatanetlossforthelastthreeyearsasaresultofbeinginanichemarket.Thecars
areresearchedanddesignedwiththeutmostqualitywhichisfollowedwithaheftypricetag,
pricingitoutofthemassmarket,resultinginthelossofrevenue.Between20122013,
netloss
increasedby96%,duetothehighamountofmoneysettoresearchanddesignthelatestModel3,
thatwillmakeTeslaagamechanger.TheModel3isdesignedtobemoreaffordable,at$35,000,
andisexpectedtohitthemassmarket2017toanewaudienceofTeslacustomer.
VerticalAnalysis
Inverticalanalysis,onecompareseachitemunderthethreemajoraccounts(assets,
liabilities,stockholdersequity)ofthebalancesheetasapercentageofthemajoraccount.Vertical
analysismeasuresthechangesthatoccurinabusinessannually.Itcanbedoneforbusinessesof
anysizeandinanyindustry.
For2014,TeslasConvertibleSeniorNotes,lesscurrentportionrepresented31%oftheir
totalliabilities.Thisillustratesthatthecompanyistakingondebtinawaythatisadvantageousto


TESLAFINANCIALANALYSIS

them.Aconvertibleseniornoteismoreadvantageoustothecompanybecausethistypeofbond
offersthelowestinterestratetothebondholder.However,thebondholderreceivestwovery
importantbenefits:acalloption,andfirstpriorityforrecourseintheeventthattheissuergoes
bankrupt(SeniorConvertibleNote,2015).Thistypeofbondhasapriorityoverallotherdebt
securitiesthathavebeenissuedbythefirm.Interestingly,thisaccountdidnotexistin2012andin
2013itaccountedfor24%.(SeeAppendix1)TheirConvertibleSeniorNotesaccountedfor10%
fortotalliabilitiesandequitywhilein2013itwas0.01%oftotalliabilitiesandequity.The
accountdidnotevenexistin2012.(SeeAppendix1)
ThefactthatTeslahassuchahighpercentageofConvertibleSeniorNotescouldexplain
whytheiradditionalpaidincapitalaccounthaschangeddramatically.Additionalpaidincapitalis
theexcesspaidbyaninvestorovertheparvaluepriceofastock(AdditionalPaidInCapital,
2015).In2014,additionalpaidincapitalaccountedfor40%oftotalliabilitiesandequity.In2013,
thisaccountedfor75%oftotalliabilitiesandequity,whereasin2012itaccountedfor107%.(See
Appendix1)
RatioAnalysis
ReturnonEquity(orROE)measureshowmuchprofitacompanycangeneratefromthe
investmentsofShareholders.ROEismeasuredbycalculatingthedivisionofnetincomeby
ownersequity.Ahighreturnonequityisanindicationofgoodhealth.Alowornegativereturn
onequityisanindicatorofpoorfinancialhealth.TeslawasaverynewcompanywhenitsROE
wascaptured.In2012itsreturnonequitywas318%whilethisnumbermayappearshocking,it
isreasonableforTeslaspositionintheindustryatthetime.Teslahadalotofcapitalinvestedin
thecompanywhentheywerefirstdevelopingandbeganproducingtheRoadster,howeversince
thecompanywasinitsinfancy,ithadnotestablishedasteadyrevenuestream,andsoROEwas


TESLAFINANCIALANALYSIS

verylow.AsrevenueincreasedontheRoadster,andsubsequentproductreleases,TeslasROE
wasgiventhechancetostabilize.In2013theirreturnonequitywas11%,andin2014ROEwas
32%.
TheCurrentRatioisaliquidityratio.Itmeasuresacompanysabilitytopayoffitsshort
term(withintheyear)obligations.Currentratioismeasuredbydividingacompanyscurrent
assetsbyitscurrentliabilities.Asageneralruleofthumb,acurrentratioshouldbeabout1.5to
indicatethatacompanycanmeetitsshorttermobligations.Alowercurrentratioshowsthata
companyisunabletomeetitscurrentsobligations,andanoverinflated,orhighcurrentratiocould
indicatethatacompanyishoardingassetsasopposedtousingthemtogrowtheirbusiness.In
2012Teslascurrentratiowas0.97,whichmeansthatTeslaisnotquiteabletomeetitscurrent
obligations,butitisnotdangerouslylow,especiallyforsuchayoungcompany.In2013Teslas
currentratioroseto1.88,whichisnotoutlandishlyhigh,butmightindicatethatTeslacoulduseits
assetsmoreeffectivelytofostergrowth.In2014Teslascurrentratiois1.52,whichmeansthe
companyhashitthesweetspotandcanmeetitscurrentobligations.
TheDebtRatiomeasurestowhattodegreeacompanyisleveragedorfinancedthrough
debt.DebtRatioismeasuredbycalculatingthedivisionoftotaldebtbytotalassets.AlowDebt
Ratioisconsideredbettersinceyouhavetopaytheinterestondebtregardlessoftheprofitability
ofthebusiness.Therefore,ahighDebtRatiomakesitdifficulttoborrowmoneyandrisker.In
2012theDebtRatioforTeslawas0.89.Whilethismayseemslightlyhighitwouldmakesense
sincetheyhaveahighrateofinvestmentinresearchanddevelopment.In2013debtratio
decreasedto0.72andin2014itincreasedto0.83.
TheReturnonAssetsRatio(ROA)measuresacompanysefficiencyandprofitability.Itis
expressedasapercentageoftotalassets.ROAismeasuredbycalculatingthedivisionofnet


TESLAFINANCIALANALYSIS

incomebyaveragetotalassets.In2012theROAwas36%,in2013itincreasedto3%,andin
2014itwas5%.Again,whilethismayseemlowitmakessenseforTeslabecausethecompany
investedalotinR&D.
ReviewofAuditorsReport
TheauditorsreportconcludedthatTesla'sfinancialfilingswerepresentedfairly,inall
materialrespectsintheyearending2014and2013.ItwasalsostatedthatinrespectstoTeslas
operationsandcashflowforthethreerecordedyearsendingin2014werecorrectlyfiledunderthe
U.S.GAAP.Teslawasreviewedbytheexternalaudittohavemaintainedinallmaterialrespects
effectiveinternalcontroloveritsfinancialreporting.Theauditincludedperformingproceduresto
understandtheinternalcontroloverfinancialreporting,assessingtheriskofmaterialweakness
thatmayexist,aswellastestingandevaluatingthedesignandoperatingeffectivenessof
controlledriskwithinthecompany.(Tesla10K,2015).Thefinalconclusionfromtheauditors
reportwasthatitwasanunqualifiedopinion.ThisconcludesthatTeslaobservedcompliancewith
GAAPandtheyreportedacleanreport.Thisopiniondoesnotexemplifygoodeconomichealth,it
statesthatthefinancialstatementsaretransparentandhasnohiddenimportantfacts.
Conclusion
Inconclusion,weknowbasedontheratiosby2014Teslaisaliquidcompany.Financially
thecompanyisincreasingitsproductionlineandisgrowingitsrevenue.Ithasmadecarsmore
affordable,therebyexpandingitstargetmarket,anditisexpandinginternationally.Asevidenced
bythisreport,Teslaisboundtomaintainsuccessandgrowasitexitsthedevelopmentphaseand
startstobecomeamajorplayerinmotorvehicleindustry.


TESLAFINANCIALANALYSIS

AppendixI:BalanceSheet


TESLAFINANCIALANALYSIS

AppendixII:IncomeStatement

AppendixIII:Ratios


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AppendixIV:StatementofStockholdersEquity


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AppendixV:StatementofCashFlows

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References
AdditionalPaidInCapitalDefinition.(2015).In
Investopedia
.Retrievedfrom
http://www.investopedia.com/terms/a/additionalpaidincapital.asp.

Hill,C.,Jones,G.,&Schilling,M.(2014).Case14TeslaMotors.InStrategicManagement:

Theory&Cases:AnIntegratedApproach(11thed.,pp.C1C13).Ohio:McGrawHill.

SeniorConvertibleNoteDefinition.(2015).In
Investopedia
.Retrievedfrom
http://www.investopedia.com/terms/s/seniorconvertiblenote.asp.

10KAnnualReport.(n.d.).