As the saying goes, cash is the lifeline of a business. Therefore, to answer the question of whether Tesla (NASDAG:TSLA) can survive without a capital raise, investors just need to look at the company’s cash flow analysis.
A cash flow analysis basically explores a company’s cash flow statements and from there, it finds out how cash is consumed and produced and most importantly, discover if there is a cash surplus or deficit at the end of the financial period.
In general, the cash flow statements consist of several pieces of financial statements that track the cash in-flow and out-flow of a company. There are 3 parts associated with the cash flow statements and they are: (1) cash flow from operation, (2) cash flow from investing activities and (3) cash flow from financing activities.
I won’t go into the detailed explanation of each part of the cash flow statements but the major difference among them lies in the cash transactions as a result of the 3 different business activities, namely operation, investment and financing. For instance, cash flow from operation basically tracks cash transaction related to the company core operations.
In Tesla’s case, the company’s core operations would be in automobile and battery manufacturing as well as sales of these products. So any cash in-flow or out-flow related to the purchase of raw materials, employees payrolls, rental payments for plants and equipment would go into this part of the cash flow statements.
In this article, we will explore Tesla’s cash flow by studying the 3 different parts of the cash flow statements and eventually this analysis will be able to answer the question of whether Tesla can survive on its own without any external capital injection.
When we perform cash flow analysis, cash flow from operating activities is usually the first place to start. The reason is that the operating cash flow generally measures the overall health of a company’s core businesses. For Tesla, these will be primarily manufacturing and sales of electric cars as well as energy products.
Therefore, by studying the operating cash flow, investors can find out if Tesla’s core businesses are generating enough cash or the other way around.
Tesla’s Operating Cash Flow
The chart above shows Tesla’s quarterly cash flow from operations over the past 5 years from 2015 to 2019.
From the first look, it may seem like Tesla’s core operations have only been consuming cash instead of producing for the last 5 years as cash flow from core businesses has been negative in most quarters. For example, cash flow was mostly in the red before 2017.
However, the company seems to be turning the tide in 2018 when cash produced from operations turned positive in 2 consecutive quarters, resulting in a net operating cash flow of as much as $2 billion in the entire year.
Operating cash flow further improved in 2019 when Tesla managed to produced positive cash flow consecutively in 3 quarters, resulting in a net operating cash flow of more than $2.4 billion in 2019 which was a 20% improvement compared to 2018.
In 4Q 2019 quarter alone, Tesla managed to generate close to $1.5 billion of operating cash flow which is a record high for the company. The result in 4Q 2019 was 15% higher year over year or nearly 90% improvement sequentially.
From the analysis, Tesla’s core businesses may seem like they are improving in terms of positive cash flow generation despite having negative profits and earnings per share as seen from this article: Tesla dividend.
However, a positive operating cash flow does not necessary mean that Tesla has enough cash to pay for expenses such as capital expenditure which is crucial for the expansion of the business. Capital expenditure or CAPEX is a form of investment in fixed assets such as factories and equipment to support the future expansion of the business.
Therefore, we will need to look at the company’s cash flow from investing activities which primarily tracks cash transactions in capital expenditures.
Before going further, I would like to briefly mentioned the primary reason for the cash flow improvement from operating activities in 2019 compared to 2018 which has resulted in a positive operating cash flow of $2.4 billion.
So what exactly happened in 2019 that has caused the company to generate a 20% higher operating cash flow in 2019 compared to prior year?
Here is a snapshot of Tesla’s 4Q 2019 operating cash flow statements:
Based on the snapshot above, Tesla’s operating cash flow improvement in 2019 mainly came from lower net loss of $300 million and reduced investment in inventory of nearly $600 million compared to 2018 as seen from the highlighted box.
Moreover, the improvement was partly driven by an increase in deferred revenue which has resulted in the extra $400 million of cash compared to a year ago.
Therefore, if Tesla had been able to make a profit in 2019 as oppose to a loss, the respective cash flow from operation would have been a whole lot higher.
Tesla’s Cash Flow from Investing Activities
Cash flows from investing activities is primarily related to capital expenditure. As briefly mentioned, capital expenditure (CAPEX) is the expansion of the company operational capability and is driven largely by the increase in fixed assets such as property, plant and equipment in Tesla’s case.
For example, the construction of Gigafactory 1, Gigafactory 2, Tesla Factory, Gigafactory Shanghai and the purchase as well as the upgrade of machinery are all part of Tesla’s capital expenditure.
Having said so, capital expenditure is a crucial part of Tesla’s future expansion and without it, the company will not be able to grow meaningfully.
Here is a snapshot of Tesla cash flow from investing activities:
As seen from the snapshot, purchase of property and equipment makes up a large part of cash flow from investing activities. Other than spending cash on factory and tools, the company also spends on other investment such as solar energy system and business acquisition as shown in the snapshot. These are also crucial investments that will enable the company to grow even further in future.
While we have seen that Tesla managed to produce a positive operating cash flow to the tune of $2.4 billion in 2019, the cash generated will not mean anything if it failed to cover the said investing activities as depicted in the chart below.
The chart above shows Tesla’s cash flow from investing activities and in order for Tesla to succeed and prosper, the cash flow from operations must be able to cover the above cash outflow from investing activities.
As seen from the current chart, all quarters reported a negative cash flow which means cash was spent instead of earned. This scenario makes sense as cash is basically spent on purchasing properties and other sorts of investment during the normal course of the business operations.
Moreover, you may notice that cash outflow from investing activities during 2017 was more than $4 billion and the figure was the largest over the 5 year period. In other words, Tesla spent as much as $4 billion in buying up properties, plant and equipment as well as other form of investment which has enabled the company to grow in 2018 and 2019 as seen from its improving operating cash inflow in those years.
From the chart alone, we can’t tell whether Tesla’s operating cash surplus has been enough to cover the cash outflow for investing activities or require an external capital injection to support future expansion.
In this regard, we will need to look at the company free cash flow. In general, free cash flow is a product of deducting the cash flow from investing activities from operating cash flow.
Here is the formula that is used to calculate the free cash flow:
Free cash flow = Operating cash flow – Cash flow from investing activities (or CAPEX)
As seen from the equation, free cash flow can be a positive or negative number, depending on whether there is enough operating cash flow to cover cash outflow for investing activities or CAPEX.
A positive free cash flow implies that a company has a cash surplus as a result of efficient business operations after deducting the required capital investment for future growth. The surplus of free cash flow can basically be used for any corporate activities such as paying down existing debts or rewarding stockholders in terms of dividends and shares buyback.
As you can see, a positive free cash flow is a very important milestone that every company must strive to achieve. With that said, I have created the following chart that tracks Tesla’s free cash flow.
Chart of Tesla’s Free Cash Flow
The chart above keeps track of Tesla’s quarterly free cash flow for the last 5 years from 2015 to 2019.
Consistent with the operating cash flow chart which we saw earlier, Tesla generated negative free cash flow in almost every single quarter from 2015 to 2017. Quarterly free cash flow started to improve in 2018 when Tesla managed to generate 2 consecutive quarters of positive free cash flow of roughly $800 and $900 million in Q3 and Q4 2018 respectively. The positive free cash flow has resulted in a net free cash flow was roughly -$240 million in 2018. Despite the significant improvement in free cash flow generation, Tesla still experience a free cash flow deficit of $240 million in 2018.
Similarly, Tesla free cash flow continued to further improve in 2019 which was in line with what we saw earlier in operating cash flow. As seen in the chart, Tesla managed to record 3 consecutive quarters of positive free cash flow in 2019, resulting in a net positive free cash flow of nearly $1 billion.
The $1 billion free cash flow was a record high for Tesla and was the first in the history of the company since its existence.
While the $1 billion free cash flow milestone is great, is the cash surplus enough for Tesla to pay down debts and at the same time invest to support new growth? Most importantly, how do we know whether Tesla can survive on its own without the need to raise another dime?
These series of questions can be answered by doing a simple analysis on the company’s working capital or precisely the revenue to current assets ratio which will be discussed in detailed in the following paragraphs.
Tesla’s Revenue to Current Assets Ratio
The table above shows Tesla’s revenue to current assets ratio for the past 5 years from 2015 to 2019. At the bottom of the table, it gives an average ratio of 2.0.
What the ratio does is that it measures the amount of current assets or working capital required to support the respective revenue. In other words, the 2.0 ratio implies that each $1 of sales requires $0.50 of current asset to carry it.
In this aspect, if Tesla were to do sales of roughly $27 billion in 2020, which is about 10% higher than the existing sales of $24.6 billion in 2019, the amount of current assets required to support the growth will be in the ballpark of $13.5 billion.
As of Dec 31, 2019, Tesla has about $12 billion of current asset in its balance sheet and the expected $13.5 billion of working capital in 2020 will require an extra $1.5 billion of investment to support the expansion.
This $1.5 billion of extra funds has to come from somewhere, either from internally generated funds such as the free cash flow we talked about or from external source such as debt borrowing. And we know that Tesla only produced about $1 billion of free cash flow in 2019 and yet, the required investment in working capital in 2020 is as much as $1.5 billion. Therefore, Tesla will be short of $500 million in working capital if the company intends to grow its revenue by 10% in 2020.
From this simple analysis, we can find out that the $1 billion of free cash flow produced in 2019 will actually not be enough to support Tesla’s future revenue growth. Be reminded that we have not even gone into the required investment in fixed assets and debt repayments that may come due in 2020.
In short, the $1 billion of free cash flow may seem like a big amount but it’s actually only touching the tip of the iceberg in Tesla’s case.
Tesla’s Cash Flow from Financing Activities
Since Tesla will be short of funds for investment into future growth as seen from prior discussion, where does the company get the required capital? The answer lies in the cash flow from financing activities which has been created in the above chart to show the company’s cash transactions from financing activities over the past 5 years.
To quickly summarize, cash flows from financing activities are primarily related to debt issuance and repayment. Aside from debt related activities, this section also cover cash inflow from the issuance of common stocks. Moreover, cash outflow will also be shown here for such activities as shares buyback and dividends payout.
To show you an example, here is a snapshot of Tesla’s cash flow from financing activities:
As simple as it seems, the snapshot above shows Tesla’s issued capitals in the form of common stocks and debt offerings (highlighted box) which totaled up to nearly $6 billion.
According to the current chart, you can see that the cash flow from financing activities has been mostly positive, illustrating that Tesla has been raising capitals instead of repaying debts.
In conclusion, we first looked at Tesla’s operating cash flow and found that the cash transactions from core operations have slowly improved over the years especially in 2018 and 2019. Besides, Tesla managed to produce a net operating cash flow of $2.4 billion as of Q4 2019, signaling that the company has gone from being a cash sucking machine to a cash cow in as little as 2 years after the inception of Model 3.
After that, we looked at Tesla’s cash flow from investing activities and this section of analysis revealed Tesla’s capital expenditure in property, plant and equipment as well as in business acquisition that basically took cash out of the company. The capital expenditure is crucial for the future growth of the company.
The product of deducting capital expenditure from operating cash flow gives us free cash flow. Consistent with Tesla’s improvement in operating cash flow, the company’s free cash flow also experience similar improvement in 2018 and 2019 but the breakthrough was seen in 2019 when net free cash flow totaled up to $1 billion in Q4 2019.
While the $1 billion of free cash flow produced in 2019 may seem like a lot, it’s still far from enough to invest in Tesla’s expanding current assets which will roughly amount to $13.5 billion in 2020, let alone investment in fixed assets and debt repayments.
Therefore, can Tesla survive without a capital raise? The answer is pretty obvious. In fact, I bet that it will not even survive through 2020 without any capital injection.
References and Credits
1. All financial figures in this page were obtained from multiple Tesla quarterly and annual reports through its Investor Relation website: Tesla Investor Relations.
2. Featured images in this article are used under creative commons license and sourced from the following websites: Maurizio Pesce.
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