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Is Tesla’s $3 Billion Debt A Cause For Concern?

Elon Musk, Tesla Factory, Fremont (CA, USA). Flickr Image.

Tesla’s debt obligation has been a hot topic, not just among investors but also among creditors who are concerned about the company’s financial health.

Investors who are keen to buy Tesla’s stock must look into the company’s debt obligations and see if the company has been loaded with an increasing debt level.

Based on the numbers, Tesla’s total debt, including current and long-term portions as well as the expected interest expenses, made up about 23% of the company’s total liability as of fiscal 2Q 2022.

A rising debt level can lead to a rising interest expense for Tesla.

Year to date, Tesla’s interest expense came up to $100 million in the first 6 months of 2022.

Can Tesla handle this amount of interest expense?

Other than the interest expense, has Tesla’s debt been on the rise?

If so, what about the company’s revenue?

If the debt is rising but revenue is sinking, should investors be concerned?

This is a question that investors must answer themselves.

In this article, we will dig into Tesla’s debt obligations and find out how the company’s debt level has changed over the years.

Aside from debt levels, we also will look into a couple of other debt-related metrics, including the debt vs revenue growth, debt to revenue ratio, net debt, debt vs asset growth, etc.

These metrics cover nearly everything about Tesla’s debt that you need to know as an investor.

Therefore, let’s take a look!

Tesla’s Debt Definition

In Tesla’s quarterly and annual filings, Tesla disclosed all debt obligations, both current and long term, in a table as shown below.

Tesla debt summary 2Q 2022

Tesla debt summary 2Q 2022

There are multiple columns specified in the above table such as “Net Carrying Value”, “Unpaid Principal Balance”, “Unused Committed Amount”, “Contractual Interest Rates” and “Contractual Maturity Date”.

The “Unpaid Principal Balance” will be the main subject of our discussion in this article.

This column specifies the total amount of debts that Tesla owes and this amount will be paid back when the debts mature.

The “Net Carrying Value” is the book value of the debt and it changes from quarter to quarter, depending on the amount of interest expense being amortized as well as the principal paid.

The contractual interest rates basically refer to the interest rates of the issued debt whereas the maturity date or debt due date refers to the date when the debt comes due.

When the debt comes due, Tesla is required to settle the unpaid principal amount instead of the carrying value since that’s the amount that the company owes to creditors.

Keep in mind that the unpaid principal amount can also fluctuate from quarter to quarter, depending on whether Tesla has paid down the debt or drawn on more debt.

Tesla’s Contractual Obligations

Some of Tesla’s contractual obligations involve mandatory purchase obligations which obligate the company to purchase a certain amount of raw materials, components and services from suppliers and third parties.

These purchase obligations contribute a huge liability to Tesla as shown in the following snapshot.

Tesla contractual obligations 4Q 2020

Tesla contractual obligations 4Q 2020

Unfortunately, some of these contractual obligations are off-balance sheet items, especially for the purchase obligations in which the amounts are mainly based on estimation.

Nevertheless, some of these items are worth mentioning.

As seen from the above snapshot, Tesla’s purchase obligations totaled as much as $18 billion as of 4Q 2020. This amount is a huge sum and contributes a big liability to the company.

Since purchase obligations are off-balance sheets and only estimation, these liabilities are excluded in the subsequent discussion, tables and charts.

Chart Of Tesla’s Total Debt

Tesla total debt

Tesla total debt

* Total debt figures are calculated by the author based on Tesla’s total unpaid principal balances.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The chart above shows Tesla’s historical total debt, both current and long-term portions as well as the expected interest expense portion, combined for the past 7 years from fiscal 2015 to 2022.

From the chart, Tesla’s total debt hit its peak figure at $13 billion recorded in 2Q 2020.

Thereafter, Tesla’s total debt started to decline and reached only $3 billion as of 2Q 2022, the lowest level the company has ever reported since 2016.

In short, Tesla’s total debt had been rising prior to fiscal 2021 but had since been on a decline in 2021 and reached only $3 billion as of 2022 Q2.

Chart Of Tesla’s Net Debt

Tesla net debt

Tesla net debt

* Net debt figures are calculated by the author based on Tesla’s total debt and cash on hand obtained from the company’s financial reports.
* Tesla’s cash on hand consists of cash & cash equivalents and the current portion of restricted cash but excludes liquidity from bitcoins.

Tesla’s net debt is the difference between its total debt and cash on hand.

Tesla’s cash on hand is highly liquid assets such as cash & cash equivalents and the current portion of restricted cash but excludes the fair market value of bitcoins that Tesla was holding.

Similarly, Tesla’s net debt hit its peak figure at about $11 billion recorded in 2019 Q1.

Thereafter, Tesla’s net debt has been going downhill and totaled only $1 billion in 2020 3Q, the last quarter that saw a positive number.

In subsequent quarters, Tesla’s net debt turned negative, implying that its total cash was greater than its debt.

As of 2022 2Q, Tesla’s net debt stood at -$11 billion, illustrating that the company had significantly more cash than debt.

The best part is that the negative figure has been on an increase as shown in the chart, meaning that the company has been having a rising amount of cash.

Debt Breakdown: Tesla vs SolarCity

Tesla vs SolarCity debt

Tesla Automotive vs SolarCity debt

* Tesla automotive and SolarCity debt breakdown is determined based on the data obtained from the company’s 4Q 2016 financial reports.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The above chart shows Tesla’s total debt breakdown into Tesla automotive and SolarCity portions.

For your information, Tesla acquired SolarCity in 2016 for $2.6 billion USD.

Tesla’s SolarCity debt was assumed from the SolarCity acquisition in 2016.

According to the chart, both Tesla’s automotive and SolarCity’s debt portions have started to decline after reaching their respective peak figures.

As of 2022 Q2, Tesla’s automotive debt totaled only $2.3 billion while the debt associated with SolarCity totaled even less, at only $0.9 billion in the same quarter.

Over the years, Tesla has slowly paid off not only its own debt but also its solar-related debt.

This demonstrates that Tesla is committed to reducing its indebtedness in both the automotive and solar businesses.

Tesla’s Debt Breakdown

Tesla debt breakdown

Tesla debt breakdown

* Debt breakdown data is obtained from Tesla’s quarterly and annual financial reports.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The table above keeps track of all of Tesla’s debt components and shows how each individual debt changes from quarter to quarter.

For debts that have been extinguished, they will no longer be shown in the table.

Aside from the individual debt figure, the debt due date or maturity date is also explicitly stated at the header of the table.

For example, the 2024 notes will be due in May 2024 as stated at the header of the table.

The table shows only the unpaid principal balance which refers to the par value or maturity value of the bond or debt instruments in which Tesla will pay off when the due dates come.

For other debt instruments such as revolving credit facilities, the unpaid principal balance refers to the amortized figures.

The debt figures in the current table combine both current and long-term portions as well as the interest expenses portion.

Some of them may have been classified as current liabilities in the balance sheets which will come due in the next 12 months while some of them may have been classified as long-term portions in the balance sheets, depending on when they are due.

Debts highlighted in “yellow” in the header are debts inherited from the SolarCity acquisition.

All the way to the right of the table lies the total debt figures that add up all the individual debts.

As of 2022 2Q, Tesla’s total debt or total unpaid principal balance stood at a new-low of $3 billion.

Tesla’s Top 3 Largest Debt Obligations

Automotive Asset Backed Notes

Tesla’s largest debt went to the Automotive Asset-Backed Notes which amounted to a staggering $2.2 billion USD as of fiscal 2022 Q2.

The Automotive Asset-Backed Notes have been rising significantly since 4Q20 when Tesla issued billions of dollars in debt to pay off other debt such as the Warehouse Agreement.

Despite the huge figure, Tesla’s Automotive Asset-Backed Notes are not merely a loan but an asset-backed borrowing that is paid back by some of the firm’s income-generating assets such as leased vehicles.

The Automotive Asset-Backed Notes will be due on multiple datelines, with the earliest due date being fixed on September 2022.

Solar Asset-Backed Notes

Tesla’s 2nd largest debt went to the Solar Asset-Backed Notes which totaled as much as $0.5 billion USD as of 2Q 2022.

The Solar Asset-Backed Notes is similar to the Automotive Asset-Backed Notes in which leased assets such as the leased solar energy generation systems are being used to repay the debt.

This debt will be due on multiple datelines, with the earliest due date being fixed on September 2024.

Cash Equity Debt

Tesla’s 3rd largest debt went to Cash Equity Debt and totaled as much as $0.4 billion USD as of Q2 2022.

The Cash Equity Debt is a fixed interest rate debt issued by one of Tesla’s subsidiaries in 2016.

The earliest date that the Cash Equity Debt will be due is on July 2033.

Tesla’s Debt Due In 2022 And 2023

Of all debts mentioned in the table above, some of them will be due in 2022.

For example, the Automotive Asset Backed Notes which bears an interest rate of 0.36%-5.48% and totals $2.2 million will be due in September 2022.

However, only a portion of the debt will be due on this particular date.

Other than the Automotive Asset Backed Notes, there is really no other debt that will be due in 2022 since Tesla has paid off most debts.

The earliest date that other debt will be due will be in 2024 and the particular debt is the Solar Asset Backed Notes.

Again, only a portion of the Solar Asset Backed Notes will be due in 2024.

Lease Obligations

Starting Jan 1, 2019, Tesla has adopted the accounting requirement for the lessee to recognize all leases (operating and finance) on the balance sheets.

As such, there will be both assets and liabilities for leases to appear in the balance sheets from Jan 1, 2019.

Previously, operating leases were off-balance sheet items in which the asset and liabilities portion of operating leases were not accounted for in the balance sheet.

Here is a snapshot extracted from Tesla’s 2021 annual filing that shows the company’s leases obligation:

Tesla minimum lease payments 4Q 2021

Tesla minimum lease payments 4Q 2021

My expectation is that leases will significantly increase Tesla’s total debt amount.

To show that, I have created a chart below that shows Tesla’s debt levels and the effect of leases on debt.

Keep in mind that the leases represent both operating and finance leases and they include the principal as well as the interest portion that Tesla must settle before the end of the lease terms.

Impact Of Leases On Tesla’s Debt

Tesla debt and leases

Tesla debt and leases

* Debt data are obtained from the prior charts while lease data are obtained from Tesla’s quarterly and annual financial reports.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

In the chart above, there are two plots and they represent total debt and total debt with lease obligations included.

The plots illustrate the impact that leases have on Tesla’s debt.

As shown, leases, both operating and finance, have considerably increased Tesla’s debt amount.

The amount of debt has increased by a large margin. For example, lease obligations, both operating and finance, have added 126% more debt to Tesla in 2Q 2022.

In Q2 2022, Tesla’s total debt increased from $3.2 billion to $7.2 billion when leases are included in the measurement of Tesla’s debt.

In this aspect, Tesla’s lease obligations have bumped up the firm’s debt level by a massive 126%.

At a figure of roughly $4 billion in both operating and finance leases reported in fiscal 2Q 2022, Tesla’s lease obligation was larger than the size of the company’s total debt level.

Additionally, you may notice from the chart that the impact of leases on Tesla’s debt is getting more significant in recent years as shown by the widening gap between the 2 plots.

For example, back in 2015 and 2016, the impact of leases was rather minimal, only 10% of total debt. However, that was no longer the case after 2019.

The results show that Tesla’s lease obligations have grown substantially over the years with respect to debt.

The reason for the growing lease obligations can be attributed to Tesla’s massive expansion in recent years which has driven the need for more factories and offices.

In short, both operating and finance leases have added a significant amount of debt to Tesla.

Tesla’s Debt Vs Assets Growth

Tesla debt vs assets

Tesla debt vs assets

* Debt data are obtained from prior chart while assets data are obtained from Tesla’s consolidated balance sheets.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

From the chart, Tesla’s total assets seem to be trending higher whereas the debt has remained flat and even declined in recent quarters.

Prior to 2020, both Tesla’s assets and debt had trended in the same direction and that was up.

However, they had been in the opposite direction since 2020, with assets going higher as opposed to the downtrend recorded for the debt.

This opposing trend suggests that Tesla has no longer used debt to build its assets.

Instead, Tesla has switched to other means such as equity or even its own earnings to expand its asset base as Tesla has been growing its profitability as well.

In other words, Tesla has been using less debt to grow.

This trend is expected as Tesla’s stock price has been surging lately.

Using equity to raise capital is less expensive and risky compared to debt when Tesla’s stock price hits record highs.

At a record stock price, Tesla can issue far fewer common stocks to raise the same amount of capital compared to when the stock price is low.

Therefore, Tesla’s investors should be glad knowing that the firm is using less debt for expansion.

Tesla’s Debt Vs Revenue Growth

Tesla debt vs revenue

Tesla debt vs revenue

* Debt data are obtained from prior chart while revenue are presented on a TTM basis.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Similarly, Tesla’s revenue has been surging whereas its debt levels have remained flat and even declined.

This trend shows that Tesla has relied less on debt to fuel its revenue growth.

In fact, Tesla will probably be self-sufficient when it makes larger profits in the future.

In that case, neither does Tesla need to borrow nor issue any equity to raise capital to expand.

In short, this trend reveals a compelling reason for Tesla’s shareholders to hold on to the shares.

Tesla’s Debt To Revenue Ratio

Tesla debt to revenue ratio

Tesla debt to revenue ratio

* Ratio is calculated by the author based on Tesla’s debt and TTM revenue data computed earlier.
* A decreasing ratio indicates better results.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

This chart is similar to the previous revenue vs debt chart.

It reinforces the idea of Tesla’s growing revenue with respect to debt.

As seen from the chart, the ratio has been trending down and reached only 0.11 in 2Q 2022, a record low for Tesla.

The decreasing ratio means that Tesla’s revenue growth has been far outpacing its debt growth.

Again, this trend bodes well for Tesla and its shareholders.

Summary

Is Tesla’s $3 billion debt a cause for concern?

Definitely no.

In fact, Tesla has been deleveraging as seen from its declining debt loads.

While Tesla’s debt has grown substantially over the years and reached its peak value at $13 billion in 2Q 2020 or $16 billion when leases are included, it has been on a downtrend thereafter.

Since then, Tesla’s debt has declined and reached $3 billion or $7 billion with leases included as of Q2 2022.

Tesla’s net debt plunged to negative numbers in 4Q 2020, indicating that Tesla has more cash than debt on hand.

Also, Tesla’s revenue and assets growth with respect to debt has shown that Tesla has relied less on debt to fuel its growth.

Instead, Tesla has used equity and cash leftover, if there is any, to expand.

References and Credits

1. Financial figures in all charts and tables on this webpage were obtained and referenced from Tesla’s quarterly and annual filings which are available in Tesla Investor Relations.

2. Featured images in this article are used under the creative commons license and sourced from the following websites: Bill Dickinson and Maurizio Pesce.

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Disclosure

The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.

If you find the information in this article helpful, please consider sharing it on social media and also provide a link back to this article from any website so that more articles like this one can be created in the future. Thank you!

{ 1 comment… add one }
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