Running head: COMPARISON ANALYSIS 1

Comparison Analysis

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Comparison Analysis

Introduction

The financial health of a business organization is key to its survival and sustainability in

the market. If, for example, the company is highly leveraged, then its financial health is poor and

the firm is in danger of bankruptcy (Ak, Dechow, Sun & Wang, 2013). Financial health of any

company is determined using financial ratios. In this paper, the aim is on examining the financial

health of Tesla, a manufacturer of electric cars. The focus of the analysis is on the 3rd quarter of

2022 and 3rd quarter of 2021 financial years. The 3rd quarter of 2022 was used because it is the

latest provided financial information for Tesla. Some of the financial ratios used for analysis are

working capital, current ratio, debt ratio, net profit margin, and return on equity among others

(Dahmen & Rodríguez, 2014). A comparison of the two periods will then be carried out to

determine how the company has been performing.

Fiscal Quarter Comparison

The following table shows the fiscal quarter comparison of the 3rd quarter of 2022 and 3rd quarter

of 2021.

Financial ratio 3rd quarter of 2022 3rd quarter of 2021

Current ratio 1.462 1.385

Working capital 11,379 6,951

Debt ratio 0.447 0.507

Earnings per share 1.05 1.66

Price-earnings ratio 252.62 223.69

Total asset turnover ratio 0.288 0.238

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Financial leverage 1.868 2.138

Net profit margin 0.155 0.121

Return on assets 0.00448 0.0287

Return on equity 0.0836 0.0613

The results show that compared to the 3rd quarter of 2021, Tesla is financially healthier in

2022. This is reflected in current ratio, working capital, debt ratio, and financial leverage. For

example, the current ratio in 2022 is 1.462 compared to 1.385 in 2021. This shows that in 2022,

Tesla has a higher proportion of current assets than in 2021. It means that the company is

currently in a better financial position to settle its short-term financial obligations when

compared to 2021 (Ak, Dechow, Sun & Wang, 2013).. However, based on current ratio, the

company was financially healthy even in 2021 since a ratio of 1.385 means that the firm had

adequate current assets to pay off all its current liabilities.

The company had also a higher working capital in the 3rd quarter of 2022 when compared

to the 3rd quarter of 2021. The higher working capital in 2022 indicates that the company has

better ability to repay more than its total value of current liabilities (Ak, Dechow, Sun & Wang,

2013). In other words, the company is in a better financial position in 2022 when compared to

2021.

The debt ratio of Tesla in 2022 is lower (0.447) when compared to 2021 (0.507). This

shows that a smaller amount of the company’s assets are financed by debt. In other words, the

company is less leveraged in 2022 when compared to 2021. However, when looked at from a
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general point of view, Tesla is not significantly leveraged since it shows that slightly over 50%

of its assets were financed by debt in 2021 while in 2022, less than 50% of the assets are

financed by debt (Dahmen & Rodríguez, 2014). It shows the company is financially healthy in

general.

However, while the other ratios show that Tesla is financially healthy, the financial

leverage ratio points to a different financial situation. For example, in the 3rd quarter of 2022, the

financial leverage ratio is 1.868 while in the 3rd quarter of 2021 the financial leverage ratio is

2.138. When the two financial periods are compared, it shows that the company was more

leveraged in 2021 when compared to 2021. A high financial ratio in both periods indicates that

the company has a lot of assets and little equity (Ak, Dechow, Sun & Wang, 2013). The

proportion of equity in 2021 is significantly lower when compared to 2022. It implies that the

company is likely to have taken on a significant amount of debt to fund its operations. However,

this is not always the case (Dahmen & Rodríguez, 2014). A high financial leverage may imply

that the company is wisely trading on its equity. In other words, the return on borrowed capital is

higher than the cost of capital. This may be supported by the low debt ratio.

Apart from financial position, there is the financial performance. This is reflected in

profitability and financial efficiency (Dahmen & Rodríguez, 2014). When compared to 3rd

quarter of 2021, the company was more profitable in the 3rd quarter of 2022. For example, the net

profit margin in 2022 was 15.5% while in 2021, it was 12.1%. Similarly, returns on equity and

assets were higher in 2022 when compared to 2021. However, 2021 outperformed 2022 in

earnings per share. It shows the company earned for each share in 2021 when compared to 2022.

Possible Reasons for the Financial Success

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The company’s improved financial position and performance in 2022 when compared to

2021 could be due to the ability of the company to manage the risk of debt, maximize strategic

and operational flexibility, and reduction in spending (Dahmen & Rodríguez, 2014). In general,

Tesla is likely to have become more efficient in its operations that have lowered the cost of

operation and increased the level of profitability. On the other hand, managing debt has reduced

the leverage level, which has improved its financial position.

Conclusion

Essentially, Tesla is financially health and this is reflected in the high current ratio and

working capital and a low debt ratio. The company’s financial position and performance is better

in 2022 when compared to 2021. The possible reason could be improved efficiency of the

company, better management of debt, and reduced spending. These could have helped enhance

the firm’s financial health.

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References

Ak, B. K., Dechow, P. M., Sun, Y., & Wang, A. Y. (2013). The use of financial ratio models to

help investors predict and interpret significant corporate events. Australian journal of

management, 38(3), 553-598.

Dahmen, P., & Rodríguez, E. (2014). Financial Literacy and the Success of Small Businesses:

An Observation from a Small Business Development Center. Numeracy: Advancing

Education in Quantitative Literacy, 7(1).