Long-term debt to total assets = long term debt / total assets
Note: For Tesla, long-term debt considered consists of long-term liabilities and total stakeholders’ equity.
3,683,889/5,849,251 = 0.63
The ratio shows that Tesla has $0.63 in long-term debt for each dollar it has in its total assets.
This implies that Ford has $0.51 in long-term debt for each dollar of total assets.
Thus, Tesla’s long-term debt ratio could be higher than the industry average. Ideally, long-term debts should not exceed assets. In this case, Tesla and Ford have fewer liabilities relative to their assets and, therefore, are not in a bad financial position and can repay debts. However, Tesla has a slightly higher ratio.
Times interest earned
Income (Loss) before Interest and Taxes or EBIT/Interest Expense
(284,636) / (100,886) = 2.82
4,342/3,496 = 1.24
Tesla can pay the interest almost three times (2.82) of its income before tax. That is, Tesla makes adequate income to pay for its total interest expense 2.83 times above or it simply implies that Tesla’s income is 2.83 times higher relative to its interest expense for the fiscal year 2014. Conversely, Ford pays 1.24 times interest with its income before tax.
The big ratio of Tesla is most favorable for creditors because it can afford to pay interests and therefore is less risky.
Operating cash flow coverage
For short-term debt
Operating Cash Flow/Short-term Debt
(57,337) /2,107,166 = -0.0272
Tesla currently realizes negative operating cash flow from its core activities. Thus, in this instance, Tesla lacks a relevant ratio, and it must focus on improving its operation activities to generate cash. The management team must worry about short-term debts.
14,507/72651 = 0.1996
Ford has a small ratio for cash flow coverage while a larger one is preferred. Nevertheless, the company can meet its short-term obligations and afford expansion activities.
The debt ratings of the company
Standard & Poor’s Ratings Services gave Tesla unsolicited ‘B-‘ based on “the company’s $920 million 0.25% unsecured convertible notes due 2019, $1.38 billion 1.25% unsecured convertible notes due 2021, and $660 million unsecured convertible notes due 2018” (Zack 1) with a stable outlook. The recovery rating is unsolicited ‘4’, unchanged to show average recovery.
Morningstar rated Ford at BBB- to show that the company is a reasonable default risk (Reynolds 1).
Tesla faces a putative security class action legal proceeding filed in 2013. The complaint is seeking damages related to false allegations, omissions, and misleading representation of the safety of the Model S (Tesla Motors, Inc. 89). The company and CEO appealed the case and the appeal is pending.
In addition, the company has incurred liabilities of between $4.0 million and $5.5 million associated with environmental liabilities in the fiscal year 2014. These contingent liabilities will affect the financial position of the company.
Ford faces several contingent liabilities related to product liability issues, asbestos issues, environmental matters, class actions and other matters, including Brazilian tax issue and transit connect custom ruling. Ford estimates that these material matters could lead to an aggregate loss of up to nearly $2.9 billion (Ford Motor Company FS-71).
Other significant off‐balance sheet financing arrangements
Tesla did not engage in off-balance sheet financing arrangements during the fiscal year 2014. Hence, no special purpose entities to facilitate off-balance sheet arrangements were noted.
Conversely, Ford had off-balance sheet arrangements consisting of purchase obligations and operating leases. They amounted to $ 1,937 million for the fiscal period 2014.
An assessment of the solvency position
Tesla’s solvency position is made weak by the observed negative operating cash flow. A significant negative operating cash flow is still expected in the fiscal year 2015. In this regard, Tesla should enhance its efficiency, rely on additional cash resources and liquidity for the coming fiscal periods to fund its investment. The balance sheet will continue to grow after the launch of Model X. However, failure to achieve targets could lead to the downgrading of the company.
Cash Flow Analysis
Cash flow from operating, investing, and financing activities
|In thousands $||In millions $|
|Operating activities||(57,337 )||264,804||14,507||10,444|
|Investing activities||(990,444 )||(249,417 )||(21,124)||(19,731)|
Cash flow patterns
The company has irregular patterns in its cash flows. Operating activities, for instance, declined from $264,804 to $(57,337), representing about a decline of 21.65 percent between the two fiscal years mentioned. Cash flow from investing activities has increased negatively from (249,417) to (990,444) while improvement was observed in cash flow from financing activities that increased from 635,422 to 2,143,130.
Tesla operating cash flow is significantly negative. As such, the company currently does not generate sufficient cash flow from operating activities to pay principal and interest on debt and meet other cash requirements.
On the other hand, Ford presents increasing figures. Cash flow from operating activities increased by 28 percent from $10,444 to 14,507 between the fiscal year 2013 and 2014. At the same time, cash flow from investing activities continued to increase negatively from (19,731) to (21,124) while cash flow from financing activities declined from 8,133 to 3,423 in the same period. Cash flow from operating activities can sufficiently pay principal and interest on debt and meet other cash requirements.
Assessment of your company’s sources and uses of cash
Tesla currently does not get any income from both investing and operating activities. It is also noted that the negative operating cash flow is most likely to persist in 2015. Hence, the company depends on cash flow from financing activities. The company concentrates on the acquisition of property and equipment. It is believed that Tesla will continue to invest in its new models and Giga factories. In addition, the stable outlook will improve if new models will boost sales.
Ford, on the other hand, continues to realize cash flow from operating and investing activities. During the financial years 2013 and 2014, there were no major investments noted in the statement of cash flow.
Book value of common stock
Stockholders’ Equity – Preferred Stock
Average shares outstanding.
No share preferred.
The value is not low and, thus, Tesla is not undervalued.
Dividends per Share/Earnings per Share
Market to book
Market cap/ (Total Equity-Preferred Stock)
4,000,000,000 / 911,710,000 = 4.389
Perhaps the management team is not generating more value from its assets.
Market Cap/Net Income
400000 /29404 =13.603
It would take Tesla about 14 years to earn back the money invested in its stock, assuming that earnings are constant. However, Tesla stock is most likely to appreciate and earn back investment in stock in a shorter period.
A gap between book and market values for the company
The gap is noted because book value is based on historical costs while market value relies on supply and demand for the company’s assets. These figures differ significantly. Market value is realized during sales.
Accounting policies and accounting method choices
Tesla and Ford use GAAP to prepare their financial statements. They also apply conservative accounting, including the use of straight-line and after-sale recognition. For instance, stock-based compensation is recognized as net of estimated forfeitures on a straight-line basis. This accounting principle also applies to lease-related upfront payment and depreciation based on the useful lives of assets. Further, Tesla and Ford recognize revenues when they are certain and reasonable that the collection is assured, delivery is done, customer arrangement is available, and fix fees are shown. Overall, revenues are recognized after-sales. Moreover, Ford discontinues accrual interests once receivable is considered uncollectible.
The segregation of core vs. non‐core activities and any nonrecurring items
Tesla and Ford do not classify their business activities specifically into core or noncore activities (Nikolai, Bazley, and Jones 187). Ford, however, presents its financial services and automotive services as two core activities while Tesla focuses on automotive sales and development services as its core activities. These core activities are consistent in all financial statements of the two companies.
Tesla and Ford have no discontinued activities or extraordinary items in their income statements. While Tesla has not had any changes in accounting, Ford now faces many several cumulative issues. For instance, Disability Accounting forced Ford to change its accounting policy from event-based to service-accrual approach to reflect life, medical and income benefits. As such, the company retroactively introduced the change in accounting method to all some amounts considered. From December 31, 2011, Ford noted a cumulative impact of the change on total equity that reduced by $250 million.
Meanwhile, Tesla is still evaluating how the new revenue recognition standard issued by Financial Accounting Standards Board in 2014 will affect its financial statements.
Although Tesla presents its financial statements with forward-looking terms, the company has failed to include its earnings forecasts for the year 2015 for reasons best known to management executives. Ford has however shown its 2015 profit outlook.
Nevertheless, Tesla shows that earnings will continue to increase after the launch of Model X with a low cost of ownership. Besides, the company intends to streamline operating costs with a significant percentage with effects on revenues.
On the other hand, analysts have provided their forecasts for Tesla.
|2015 ($ billions except shares earnings)||2016 ($ billions except shares earnings)||Growth rates|
|Revenue||5.39 (consensus) |
|8.67 (consensus) |
|Average growth rate +180.52 %|
|Earnings per share estimates||0.01 (high)||1.88 (consensus) |
|Average growth rate -38.07%|
|Dividends||Information not available||Information not available||Information not available|
|Share price forecast||Based on the next 12 months |
450.00 (high +95.4 %)
282.00 (Medium +22.5 %)
180.00 (low -21.8 %)
Source: (Tesla Motors Inc: Forecasts1).
Analysts’ forecasts for Tesla would give a more objective view of the company’s performance relative to the management forecast report. In this case, these forecasts are based on analyses from more than ten experts while management forecasts would be purely based on internal opinions.
View on the forecast
These data provided by analysts can only be reliable and consistent if they have used the complete set of financial information from financial statements and accounted for cash flows, statements of operations, balance sheets, and any other useful information.
The information presented by analysts, therefore, is consistent because of rigor in analysis and the number of experts involved gives the process and outcomes consistency and credibility (Leavy 392). Analysts also possess a better understanding of Tesla’s earnings processes and can provide high-quality forecasts based on the highest, low, medium, and consensus.
Integrative Framework: ROE Framework Model
ROE = Net Income/Sales*Sales/Assets*Assets/Equity = Return on Sales (Profitability) * Asset Turnover (Efficiency) * Asset-to-equity ratio (leverage)
-294,040 / 3,198,356 = -0.0919
3,198,356/5,849,251 = 0.547
5,849,251/ 911,710= 6.42
ROE = -0.0919*0.55*6.42 = -0.32
3,186/144,077 = 0.0221
144,077/208,527 = 0.69
208,527/24,832 = 8.34
ROE = 0.0221*0.69 * 8.34 = 0.127
Based on the DuPont model, all the three critical elements of financial statement analysis have been considered for the ROE. Tesla has a negative ROE of -0.32 while Ford shows a small ROE of 0.13. These ratios show what both companies derive from their assets as earnings. Hence, investors can rely on the ratio to show that Tesla is a profit-burner, at least for the fiscal period under analysis. On the other hand, Ford is a profit-creator but not at a higher rate. Thus, the management’s profit-creation efficiency of these firms is not impressive.
It, therefore, seems Ford and Tesla lack a competitive edge from their operations associated with the poor generation of profits. Corporations rely on a competitive edge to gain superior returns from their investments. A comparison of Tesla, a recent firm, and Ford, an old player, shows that ROE in the auto industry is not large when establishing the benchmark.
An improvement in ROE shows that a company is most likely to enhance profit growth without additional equity from investors. It also shows the efficiency of the management team to use investments to create more profits.
It is imperative to note that a firm can grow revenues faster than the ROE even without further investments. To avoid further costs associated with raising new capital, Tesla should rely on its internal resources to avoid further interest expenses, which ultimately affect the net income.
Analysts believe that the company will bring in more revenues in the future. The company’s financial statements show that Tesla revenues are growing rapidly. With the intended release of the new Model X in the market, Tesla expects further additional revenues. It is also imperative to recognize that the company did not meet some of the orders placed because of low production capacity.
With a stable credit rating based on average repayment of debts, Tesla now requires efficient, timely delivery for its overseas customers. In addition, the company must be able to meet the increasingly high demands for electric vehicles as the need to save the environment now creates positive impacts for Tesla. Tesla must also continue to manage its operational activities by enhancing efficiency to save costs, leverage current investments while improving the current cash and liquidity ratios. These combinations would present a positive outlook for investors. In addition, Tesla currently needs to demonstrate that its operations are sustainable, and it will continue to work on the market position.
Ford Motor Company. Ford Motor Company: FORM 10-K Annual Report 2014. Washington, DC: Securities & Exchange Commision, 2014. Print.
Lehavy, Reuven. “Discussion of ‘‘Are earnings forecasts more accurate when accompanied by cash flow forecasts?’’.” Review of Accounting Studies 14 (2009): 392–400. Print.
Nikolai, Loren, John Bazley and Jefferson Jones. Intermediate Accounting. Boston: Cengage Learning, 2009. Print.
Reynolds, Samantha. Ford Motor Company Receives “BBB-” Credit Rating (F). Dakota Financial News. 2015. Web.
“Tesla Motors Inc: Forecasts.” Financial Times. 2015. Web.
Tesla Motors, Inc. FORM 10-K: Annual Report 2014. Washington, D.C: EDGAR Online, Inc, 2015. Print.
Zack, George. Tesla Motors Inc (TSLA): S&P Affirms B- Corporate Credit Rating On Stable Outlook. 2015. Web.