financial business analysis - tesla motors

- 1 -Hult International Business School – MBA Class 2016 – Golden Gate – Team 8Mod. A – International Accounting

Disruptive innovations in the Automotive: Is Tesla a sustainable business?


Conclusion

Tesla’s economic and financial positions appear to be too fragile for the considering future market

developments.

The analysis performed reaches the conclusion that currently Tesla’s business model appears not to be

sustainable in the long period


Executive Summary

Automotive Industry

Industry Overview: Shifting Paradigm

The Companies: Tesla vs Ford

The Analysis: Disruptive vs Traditional

Operating activities

Growth trends

Sources of financing

ROE and ROA

Major findings

Conclusion

Agenda


The present financial analysis focuses on Tesla Motors, a battery-car start-up based in California which promises to set the base for a great paradigm shift in the Automotive Industry

In order to better appreciate the importance and the scope of what has been defined by many as the next “Big Thing” the analysis compares Tesla’s economic and financial performances over a 5-year period, from 2010-2014, to Ford’s ones

The choice of selecting a company, such as Ford, with a completely different business model, target market and value chain as a main benchmark for Tesla, serves the purpose of gauging the effects of two opposite side of a changing industry on the Companies’ Financial figures and ratios

Executive Summary


Agenda

Executive Summary

Automotive Industry





Growth trends


ROE and ROA

Major findings

Conclusion



15.9%

Green Energy Movement: concerned about Environmental sustainability

Cost Efficiency: Electric Cars have low cost maintenance when compared with the fuel cars.

Innovation: High performance cars with user customization.

The Automotive Industry paradigm may be shifting along 3 main axis

Comparison between Tesla’s and Ford’s Market share in the Automotive Industry in US

[2014; % of total market share]

0.01% INNOVATION

GREEN ENERGY

COST



Technology

Supply Chain

Sales Model

R&D

Environment

Electric Engine

User customization

Internal Combustion Engine

Vertically Integrated Tier-based manufacturing model

Company owned sales distribution model

Web based selling model

Franchisee sales distribution model

Disruptive and breakthrough Innovation Incremental Innovation

Environment-Friendly

Zero-emission target

Still in the Initial Phase for Green Energy Development


Agenda

Executive Summary

Automotive Industry





Growth trends


ROE and ROA

Major findings

Conclusion



83%72%

9%19%

5%3%

TESLA

3.419

FORD

144.077100%

R&DSG&ACOGS

POSITIVE EBIT

Breakdown of Revenues components

[2014; $ Mln; % of total revenues]

NEGATIVE EBIT

16%7%

COGS increase primarily because of the amount of Raw materials. From 2013 to 2014 the increase in cost was from $228.2 million to $500.2 million

SG&A Investments are primarily from higher headcount and costs to support an expanded retail and services

R&D Investments have been increasing year by year. In 2014 the increase of almost 50% is primarily to support Model X expenses and Model S upgrades

EBIT difference between Gross Income and SG&A and R&D. Gross Income has been increasing but still below their operation expenses

The analysis on Operating Activities suggests that Tesla’s current margins do not fit with the current

cost structure of production


Tesla’s profitability over the previous five years has seen some dramatic changes, though one thing has remained constant: their losses

The losses mainly pertain to Tesla’s fast development as a relative newcomer in the automotive industry

Ford’s sales continuously have risen, yet the growth of Tesla is exponential in comparison

In terms of Tesla’s gross profit ratio, although this ratio dictate more cost than revenue, they remain higher than the industry giant Ford

Growth Trends

Trend of Tesla’s Revenues

[2010 – 2014; $ Mln]

413204117

+59%

3.198

2014201220112010 2013

2.013

20122011 2013

40

20

35

30

20142010

25

FORDTESLA

Gross Profit Ratio trend comparison

[2010 – 2014; %]

On the profitability side historical data confirm that If they continue on their trajectory, their sales and

operations will start to become profitable


The automotive sector due to its capital-intensive structure, relies more than any other sector on heavy borrowing

Ford Debt-Equity percentage show a year on year decrease on the last five years, Tesla, displays a more irregular pattern. Its reliance on debt has increased in the last years

The comparison with Ford becomes interesting when comparing Total Debt and Total Asset. In this case it appears like, despite of a heavy reliance on debt compared to other sources of financing, Tesla is well below the average level of Ford and the main Automotive players

Sources of Financing

2

8

4

6

02010 2011 20142012 2013

12

10

FORDTESLA

Liabilities to Equity trend comparison

[2010 – 2014; Absolute value]

Even though ratio analysis shows that the actual level of debt is well managed, the strong leverage Tesla is

exploiting now has to be backed up by a considerable amount of profits in the year to com

201320112010 2014201210

50

60

40

70

30

20 TESLAFORD

Total Debt and Total Assets trend comparison

[2010 – 2014; Absolute value]


ROE and ROA

ROE %

ROA %

-37

-118-113

-200

-150

-100

-50

-250

0 -19

-227

-46

0

-10

-30

-50

-60

-20

-40

-4 -7

-43

-60

1234

282

0

100

150

250

300

50

2010

200

20122011 20142013

37

2

4

12

8

6

10

2

12

4

2012 20132011 20142010

43

2010 2011 2012 2013 2014


Agenda

Executive Summary

Automotive Industry





Growth trends


ROE and ROA

Major findings

Conclusion


In performing the analysis on Tesla’s operating activities and cash flows and comparing with Ford’s, focusing on Tesla’s variability was paramount. Ford’s stability as an incumbent showed limited variability. These indications are key to analyzing the entrant of a innovative start-up to a long time incumbent. The conclusion on operating activity analysis suggests that Tesla’s current margins do not fit with the cost structure of production. If the trend continues along its current trajectory, its hard to imagine that it will be sustainable in the long term.

Revenues are growing at a promising rate even though there are still concerns regarding the sustainability of the income statements lines i.e. gross profit margin net income and EBITDA.

Looking at the capital and debt structure of Tesla, the company is currently benefiting from a low rate of debt issuance and high level of capital injection from the market. Nonetheless, the current method Tesla is using to manage debt and capital leverage appears to not be sustainable in the long term.

Major findings

Operating Activities

Growth trends

Sources of Financing


Agenda

Executive Summary

Automotive Industry





Growth trends


ROE and ROA

Major findings

Conclusion


Conclusion

Tesla’s economic and financial positions appear to be too fragile for the considering future market

developments.

The analysis performed reaches the conclusion that currently Tesla’s business model appears not to be

sustainable in the long period

financial business analysis - tesla motors

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