Cash is literally the lifeline of a business.
For this reason, Tesla (NASDAQ:TSLA) cash flow has always been a hot topic, not just among the investors but also the creditors.
Most parties want to know about Tesla’s cash position, and they are eager to find out whether the company has enough liquidity to run its businesses.
While Tesla may have been making some profits in recent quarters, it’s a different story when it comes to cash reserve or cash on hand in the balance sheets.
As you will see in the following charts, Tesla’s cash on hand has been mostly positive and in fact, been growing substantially in the past 5 years.
Before we begin, Tesla’s cash on hand, cash reserves or cash positions discussed in this article are the combinations of cash, cash equivalents and restricted cash disclosed in the balance sheet and the terms are used interchangeably.
In the following discussion, we will dig into Tesla’s cash position and analyze the respective cash reserves over a period of time to see how the numbers have changed.
In addition, we will also find out whether Tesla’s cash on hand has been enough to cover its cash outflow.
In this aspect, we will compare the company’s cash on hand with free cash flow which is derived from operating cash flow minus capital expenditures.
Finally, we will explore the reason for the uptrend seen in Tesla’s cash position.
Let’s move on!
Chart of Tesla’s Cash On Hand
The graph above shows Tesla historical cash on hand or cash reserve for the past 5 years from 2015 to 2020.
Cash on hand or cash position as depicted in the chart above refers to highly liquid current assets, including cash and cash equivalents disclosed in the balance sheets.
Aside from cash and cash equivalents, restricted cash – only the current portion – is also included as part of Tesla’s cash on hand in the chart above.
The long-term portion of restricted cash is excluded as they are collateral which needs to be held for more than 1 year. Here is what Tesla said about restricted cash in the financial statements:
We maintain certain cash balances restricted as to withdrawal or use.
Our restricted cash is comprised primarily of cash as collateral for our sales to lease partners with a resale value guarantee, letters of credit, real estate leases, insurance policies, credit card borrowing facilities and certain operating leases.
In addition, restricted cash includes cash received from certain fund investors that have not been released for use by us and cash held to service certain payments under various secured debt facilities.
Here is a snapshot that shows examples of Tesla cash and cash equivalents as well as the current portion of restricted cash disclosed in the Q4 2020 financial statement:
Coming back to the chart above, Tesla’s cash on hand has basically been trending upward since 2015.
For example, cash on hand in Q1 2015 was roughly $1.5 billion but the amount has since gone higher and reached more than $19 billion as of Q4 2020.
Why is Tesla racking up so much cash all these quarters?
In this sense, not only does Tesla have to deal with the high costs of maintaining its plants and equipment but also high-paid technical personnel who are often under union contracts.
This is especially true when the company is in the midst of an expansion.
This high-expense and high-cost business environment often mean that Tesla needs a very large cash position to deal with the expanding business and thus, the growing working capital requirement.
For this reason, Tesla current asset has also been increasing over the years.
For the most part, more than 70% of the company’s current asset is in cash and cash equivalents as seen from the following snapshot.
With an increasing working capital requirement, it seems natural that Tesla’s cash reserve or cash position will also be increasing.
Tesla’s Free Cash Flow
While Tesla’s cash position has been increasing over the years, is it sufficient to cover the ever-increasing cash consumption?
Tesla’s cash consumption or cash burn comes from two areas: (1)operating activities and (2)capital expenditures.
Operating activities are day to day business activities that consumes operating cash flows, including employees payroll, offices and factories rental, equipment and tools maintenance, R&D expenses, contracts, advertising and administrative expenses.
On the other hand, capital expenditures or CAPEX are cash needed to acquire and maintain hard assets such as property, buildings, equipment, offices and factories.
For Tesla, capital expenditures are crucial financial outlays required to maintain and expand its business operations.
In the balance sheet, Tesla’s capital expenditures are treated as investment rather than expenses. For example, the Gigafactory Shanghai China and Gigafactory Berlin Germany which were recently launched were accounted as capital expenditures.
Be reminded that debt repayment and refinancing do not fall into the operating activities of the company and hence, it’s not part of the cash outflow discussed here.
To analyze Tesla’s cash consumption or cash outflow, we will look at the company’s free cash flow which is plotted in the following chart.
In general, free cash flow is derived from the following equation:
Free cash flow = operating cash flow – capital expenditures
The operating cash flow can be a positive or negative number, depending on whether Tesla’s business operations can generate a positive or negative operating cash flow.
Sometimes the business can use up more cash than it can generate during the normal course of the business operation. In this case, the operating cash flow will be a negative number.
Coming back to the chart, the free cash flow chart above depicts Tesla’s quarterly cash outflow over 5 years from 2015 to 2020.
According to the chart, Tesla’s quarterly free cash flow has been mostly in the red in most quarters, implying that the company’s operating activities have failed to generate sufficient cash to covers its business operations and CAPEX.
In fact, Tesla’s core businesses, automotive and solar, had consumed more cash than it could bring in as depicted in all the negative free cash flow figures in the above chart.
Nevertheless, Tesla’s free cash flow has improved over the years, particularly in recent quarters.
If you look closely at the current chart, Tesla’s cash outflow was the worst in 2017, leaving the company with a cash deficit of as much as $3.5 billion in the entire year.
The same goes for 2018 in which Tesla burned up to $1 billion cumulatively in 1Q18 and 2Q18.
The worst may have been over for Tesla in 2019 when Tesla managed to generate positive free cash flow in 3 consecutive quarters.
Also, despite being disrupted by the COVID-19 outbreak throughout 2020, Tesla has successfully grown its positive free cash flow in 3 consecutive quarters in 2020.
Particularly, Tesla’s free cash flow reached as much as $1.9 billion in 2020 4Q alone, representing a growth of more than 80% on a year over year basis.
In short, all hope is not lost for Tesla.
Tesla’s Free Cash Flow (TTM)
The quarterly free cash flow chart may not reflect the true scenario of Tesla’s free cash flow generation.
As such, I have created the trailing 12-months (TTM) chart above to smooth out the bumps and to clearly show you the improvement in Tesla’s free cash flow.
From a TTM perspective, we can clearly see that Tesla’s free cash flow did improve tremendously from 2019 and onward.
Between 2019 and 2020, Tesla’s free cash flow has been mostly positive and reached as much as $1 billion on a TTM basis in several quarters, suggesting that the company’s business operations have got more efficient in terms of cash flow generation.
As of 2020 4Q, Tesla achieved a record high of $2.8 billion in free cash flow on a TTM basis, a new record for the company since its inception.
Tesla’s record amount of free cash flow generated in 2020 has been primarily driven by the unprecedented Model 3 and Model Y delivery throughout 2020.
Tesla’s Cash Reserve vs Cash Outflow
I have combined both the cash reserves and cash outflow into the same chart as shown above to compare Tesla’s cash on hand with cash outflow.
Tesla’s cash outflow in the chart is basically the same as the quarterly free cash flow which we discussed earlier.
Therefore, Tesla’s cash outflow consists of both operating cash flow and capital expenditures.
Why only operating cash flow and capital expenditures?
The reason is that these 2 items consume the most cash in Tesla’s businesses.
According to the chart, Tesla’s cash on hand has been more than enough to cover what the company has spent in the last 5 years.
Although Tesla’s free cash flow had been mostly negative from 2015 to 2018, the company had even bigger cash reserves to support the cash shortfall in most financial periods.
In 4Q 2020, Tesla has a cash position of more than $19 billion sitting nicely in the banks.
In the same quarter, the company generated $1.9 billion in free cash flow, leaving plenty of cash around for the next quarter and the rest of 2021.
In short, Tesla’s cash on hand or cash reserve has been sufficient to cover the company cash outflow throughout most quarters in the past 5 years.
Going forward, Tesla will be having enough cash in the bank to pay for its business expenses and invest for future growth.
To this end, Tesla has actually invested some of its cash reserves in bitcoin. Specifically, Tesla has bought about $1.5 billion of bitcoin in Jan 2021 according to the following excerpt.
Here is an excerpt extracted from the 2020 annual report regarding Tesla’s investment in bitcoins.
Tesla Investments in Bitcoin
In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, we may invest a portion of such cash in certain specified alternative reserve assets.
Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.
Tesla’s Cash Flow from Financing Activities
While Tesla may have been free cash flow positive in recent quarters, the amount does not seem to be large enough to grow Tesla’s cash position to the existing level.
For instance, Tesla managed to raise its cash reserves by more than 30% or $5 billion within a single quarter from 3Q20 to 4Q30.
However, Tesla produced only about $1.9 billion of free cash flow in 2020 Q4.
The numbers did not seem to add up.
How did Tesla manage to grow its cash on hand to $19 billion when the respective free cash flow was only $1.9 billion?
The answer can be found in cash flow from financing activities.
The following chart depicts Tesla’s quarterly cash flow from financing activities over the last 5 years from 2015 to 2020.
According to investopedia, cash flow from financing activities focuses on how a firm raises capital.
Here is a paragraph from Investopia regarding cash flow from financing activities:
“A positive number indicates that cash has come into the company, which boosts its asset levels. A negative figure indicates when the company has paid out capital, such as retiring or paying off long-term debt or making a dividend payment to shareholders. ”
Based on the chart above, you may notice that Tesla has been cash-flow positive from financing activities in most financial periods.
Apparently, the company has been raising capital through common stock offerings and debt issuings over the years.
To further illustrate, the snapshot below shows Tesla’s capital raise through financing activities:
In the snapshot above, Tesla raised as much as $5 billion of cash through common stocks issuance in Q4 2020.
In the same quarter, Tesla repaid some of the debts which amounted to about $2.3 billion.
As a result, the net cash Tesla managed to raise in 2020 Q4 was about $2.7 billion.
This amount of cash generated from net cash from financing activities is also shown in the chart above.
As mentioned, Tesla generated about $1.9 billion in free cash flow in Q4 2020.
With net cash of $2.7 billion obtained from financing activities and coupled with the generated free cash flow of $1.9 billion, Tesla’s cash on hand of $19 billion reported in 2020 4Q seems to add up now.
For example, Tesla obtained a total of $4.6 billion of cash in 2020 4Q alone.
When you add that amount to the prior quarter, the final figure of cash on hand arrived at the total $19 billion reported in 2020 4Q.
Tesla’s cash on hand or cash reserves are highly liquid assets which include cash such as cash and cash equivalents as well as short-term restricted cash.
In the last 5 years, Tesla’s quarterly cash position has grown from $1.5 billion in Q1 2015 to more than $19 billion in Q4 2020.
The growth in cash reserves is attributed to the expanding working capital requirement when the company is actively growing its business.
Tesla cash outflow or cash burn can be derived from its historical free cash flow which is measured by deducting capital expenditures from operating cash flow.
As the chart shows, Tesla has been generating negative free cash flow in most quarters from 2015 to 2020, signaling that the company has used more cash than it could bring in.
However, the trend has reversed in favor of Tesla when the company managed to be cash-flow positive consecutively many quarters from 2019 to 2020.
Tesla cash on hand has been sufficient to cover its cash outflow in most reporting periods, judging from the surplus of cash on hand after accounting for negative free cash flow.
Although Tesla continued running its business at positive free cash flow in recent quarters, the company still raised extra capital through stock offerings and debt issuance as seen from the cash flow from financing activities.
This has resulted in the growing cash reserves in Tesla’s balance sheets to the tune of $19 billion as of 2020 4Q.
References and Credits
1. Financial figures in all charts and tables were obtained and referenced from quarterly and annual filings available in Tesla Investor Relations.
2. Featured images in this article are used under creative commons license and sourced from the following websites: Marco Verch.
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