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Is Tesla Having Sufficient Cash On Hand?

Tesla Gigafactory Shanghai. Source: Tesla Q3 2019 Update Letter

Tesla (NASDAQ:TSLA) cash flow has always been a hot topic. That’s because cash is literally the life line of a business. Not only are investors interested in the cash position of Tesla, but creditors as well are also concerned about Tesla liquidity.

While Tesla has been making losses and thus having negative operating cash flows in most quarters, it’s a different story when it comes to cash reserve or cash on hand in the balance sheet. As you will see in the following graphs, Tesla cash on hand has mostly been positive and in fact, the amount has actually been trending higher over the past 5 years.

Before we begin, cash on hand and cash reserve are meant the same thing which are cash or cash equivalents plus restricted cash disclosed in the balance sheet and are used interchangeably in this article.

In the following discussion, we will dig in to find out Tesla’s cash position by looking at the company cash reserve in the balance sheet across a period of time.

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 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 upward trend of Tesla’s cash position. Despite being cash flow negative all these years, Tesla cash on hand has actually been ballooning and reached an all-time high in the latest quarter of 2Q 2020. This is puzzling as the situation seems to contradict – negative free cash flow but ballooning cash reserve or cash position.

So sit tight and read on!

Chart of Tesla’s Cash On Hand

Tesla cash on hand

Tesla 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 here basically referred to highly liquid current assets such as cash and cash equivalents disclosed in the balance sheet. Besides, I have also included restricted cash – only the current portion – as part of 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:

Restricted Cash
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 Q2 2019 financial statement:

Tesla cash on hand example

Tesla cash on hand example

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 moved higher and reached close to $9 billion as of Q2 2020.

As we all know, Tesla has mostly been unprofitable all these years and yet, the company has been able to accumulate to such a significant amount of cash reserve. Before exploring the question of where and how Tesla managed to increase its cash reserves, let’s explore the reason the company needed such a large cash position in the first place.

So why does Tesla need such a large amount of cash on hand? It’s simply due to the automobile business being a very capital intensive business. Basically, the automobile business is an asset-heavy operation that requires a large amount of cash to run.

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-expenses and high-cost business environment often mean that Tesla needs very large cash on hand to deal with the expanding working capital requirement. For this reason, Tesla current asset has also been increasing over the years. For the most part, as much as 50% of the company’s current asset is in cash and cash equivalents as seen from the following snapshot.

Tesla cash and cash equivalents Q4 2019

Tesla cash and cash equivalents Q4 2019

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 cash position has been increasing over the years as discussed in prior paragraphs, the next question is whether this amount of cash is sufficient enough to cover the ever-increasing cash consumption.

Tesla’s cash consumption or cash burn mainly comes from two items: (1)operating activities and (2)capital expenditures.

Operating activities are day to day business activities that consumes operating cash flows such as 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 which was just opened in early of 2019 is part of Tesla capital expenditures.

Take note that debts repayment and refinancing does 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.

Tesla free cash flow (Quarterly)

Tesla free cash flow (Quarterly)

In general, when we deduct capital expenditures from operating cash flow, we get free cash flow. As such, free cash flow is basically derived from the following equation:

Free cash flow = operating cash flow – capital expenditures

The operating cash flow from the above equation 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 its 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.

As you can see, Tesla’s quarterly free cash flow has been mostly in the red throughout the shown period, 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 current chart.

Nevertheless, Tesla’s free cash flow has improved over the years. If you look closely at the current chart, Tesla’s cash consumption was the worst in 2017, leaving the company with a cash deficit of as much as $3.5 billion in the entire year.

The worst may have been over for Tesla in 2018 when the company was breaking even in terms of free cash flow generation as shown in the chart. The breakthrough in free cash flow generation occurred in 2019 when Tesla managed to generate close to $1 billion of cash from its operation after deducting capital expenditures.

Also, despite being disrupted by the COVID-19 outbreak throughout 2020, Tesla still managed to generate a free cash flow of nearly $500 million in 2Q 2020.

In short, all hope is not lost for Tesla.

Tesla’s Free Cash Flow (TTM)

Tesla free cash flow (TTM)

Tesla 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 better show the improvement in Tesla’s free cash flow.

As reflected in the chart above, Tesla’s free cash flow did improve tremendously in 2019 and 2020 on a TTM basis. Tesla’s free cash flow has been hovering around the $1 billion levels for the past several quarters, suggesting that the company’s business operations have been getting more efficient in terms of cash flow generation.

Comparing Tesla’s Cash Reserve and Cash Outflow

Tesla cash on hand and cash outflow comparison

Tesla cash on hand and cash outflow comparison

To figure out whether Tesla’s cash on hand or cash position has been sufficient to cover its cash consumption or cash outflow, I have combined both the cash reserves and cash outflow plots into a single chart as shown above.

As mentioned, Tesla’s cash outflow is made up of operating cash flow and capital expenditures. The combination of operating cash flow and capital expenditures equals free cash flow. In the same context, free cash flow is equivalent to cash outflow which is plotted in the chart above.

As shown in the current chart, Tesla’s cash on hand has been more than enough to cover what Tesla 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 cover the free cash flow shortfall in most financial periods.

Take for example in Q3 2017, Tesla had a cash flow deficit to the tune of $1.5 billion and yet, its cash position still sat nicely at $3.7 billion. After the quarter, the $3.7 billion of cash on hand would be stashed away in the bank and be used in the next quarter of Q4 2017.

Another example would be that in 1Q 2019 when the company spent nearly $1 billion of free cash flow but its cash on hand was more than enough, in fact twice as much as what the company had spent, to cover the deficit.

By 2Q 2020, Tesla has already had nearly $9 billion of cash as reserves in the banks. During the same quarter, the company has also generated as much as $500 million of free cash flow, leaving plenty of cash around for the next quarter and the rest of 2020.

In short, Tesla’s cash on hand or cash reserve has been adequate to cover the company cash outflow throughout most quarters in the past 5 years. Judging from the trend in the chart, Tesla will most likely be able to do the same in future which is having enough cash in the bank to pay for its business expenses and invest for future growth.

Tesla Cash Flow from Financing Activities

After all the discussion about Tesla’s cash on hand and free cash flow, where does Tesla actually source its cash? This question emerged because Tesla’s free cash flow does not seem to be the source that has caused the expanding cash position.

While we have seen improvement in Tesla’s free cash flow generation in recent quarters, the company’s cash flow generation capability is still not large enough to put such a huge amount of cash in Tesla’s coffer.

For instance, when you looked at the previous chart where both cash on hand and free cash flow are combined, Tesla managed to raise its cash on hand by nearly $3 billion within a single quarter from 1Q19 to 2Q19. However, the company’s free cash flow generated was only about $600 million in 2Q 2019, meaning that cash reserves should only come to about $2.9 billion when you add up both free cash flow in 2Q 2019 ($600 million) and cash reserves from the prior quarter ($2.3 billion).

Instead, Tesla’s cash reserves moved higher in the subsequent quarter of 2Q 2019 to a record high at $5 billion. Therefore, where does the difference of $2 billion in cash come from?

The answer can be found in cash flow from financing activities. Basically, Tesla also sources its cash from financing activities such as through stocks issuing and debts borrowing.

In this aspect, I have created a chart that depicts Tesla’s quarterly cash flow from financing activities over the last 5 years from 2015 to 2020 which is shown below.

Tesla cash flow from financing activities

Tesla cash flow from financing activities

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. ”

Looking at the current chart of cash flow from financing activities, 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 borrowings over the years. To further illustrate, I have provided a snapshot below that shows Tesla’s capital raise in cash flow from financing activities:

Tesla cash flow from financing activities

Tesla cash flow from financing activities obtained from Q3 2019 quarterly report.

In the snapshot above, Tesla raised as much as $8 billion of cash through a combination of common stock offering and debts within the 9 months ended Sept 30, 2019.

Referring to the chart again, whenever cash came into the company in any quarter, it will be shown as positive figures in the chart and this will result in a higher cash position. Coming back to 2Q 2019, there was roughly a $2.2 billion of cash inflow through financing activities. Therefore, this has solved the missing $2 billion of cash difference that we saw earlier.

Again, the cash inflow from financing activities alone was only $2.2 billion in 2Q 2019. Adding this amount with the free cash flow generated in the same quarter of roughly $600 million, the total amount of cash inflow was $2.8 billion. So that adds up to almost $5 billion of cash on hand from Q1 to Q2 2019.

Conclusion

Tesla’s cash on hand or cash reserves are highly liquid assets which include cash such as cash and cash equivalents as well as restricted cash. In the last 5 years, Tesla’s quarterly cash position has grown from $1.5 billion in Q1 2015 to nearly $9 billion in Q2 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.

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.

Though Tesla continued running its business at negative free cash flow in most quarters, the company did it by raising capital through stock offerings and debt issuance as seen from its cash flow from financing activities. This has resulted in the increasing cash reserves in the company balance sheet for the last 5 years.

References and Credits

1. Financial figures in all charts and tables were obtained from 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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