Tesla Motors Inc. released its Fourth Quarter & Full Year 2012 Shareholder letter on Wednesday. While the letter provides a very positive outlook for Tesla’s future, there are some questions looming in the background once we dig deeper into Tesla’s balance sheet.
Despite supply chain issues, Tesla has apparently achieved their stated goal of producing 400 cars per week at their Fremont, California factory. Tesla hopes to capitalize on its new found production ability, an annualized rate of 20 000 units per year, to take the Model S into Europe and Asia. However, there is still no indication whether Tesla will be reporting their sales figures in the United States like other auto makers do.
When viewed in isolation, Q4 has undeniably been one of the most successful sales periods for Tesla. 74% of Tesla’s overall revenues were recognized in Q4 alone, and reported sales growth from Q3 to Q4 was over 500%. But Tesla’s broader financial health isn’t nearly as rosy. The firm’s Q4 loss is reported at almost $90 million or $0.79 on a per share basis. Tesla’s net loss this year is almost $400 million, or $3.69 per share. Despite the fact that Tesla has slowly been improving its operating margin, which currently is at 8%, Tesla has not been able to carve enough contribution out of its sales to help cover its staggering Research and Sales expenses.
These costs combined make up 103% of Tesla’s overall revenues. Despite the fact that Tesla estimates a 15% reduction in its R&D costs for 2013, it is still fighting an uphill battle. Expansion into Europe and Asia will also require more retail and marketing resources, which will only further add to Tesla’s profitability woes.
At this time, Tesla remains highly leveraged, with a debt to equity ratio of 3.62. With some $450 million in long term debt sitting on its books (and nearly $1 billion in total liabilities), and no earnings to repay it with, Tesla’s future stability is questionable. While it does have approximately $200 million cash on hand, between a negative cash conversion cycle of 46 days and interest payments on the debt, not to mention negative free cash flow of over $500 million, one can only wonder how long until the well runs dry. Despite Tesla’s stated “cash flow positive” status in Q1 2013, this is using non-GAAP figures.
Hope still remains for the zero emissions car manufacturer as it looks to achieve economies of scale and reduce its fixed costs through improved production efficiencies. The projected increase in volume will also help towards the bottom line.
N.B: GAAP Figures used
Graeme Kreindler is an HBA Candidate at the Richard Ivey School of Business at The University of Western Ontario.