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 has been makig tiny profits in recent quarters, it’s a different story when it comes to the company’s cash reserve or cash on hand disclosed 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 massively expanding in the past 5 years.
Before we begin, Tesla’s cash on hand, cash reserves or cash positions mentioned in this article are the combinations of cash, cash equivalents and restricted cash disclosed in Tesla’s balance sheet and these 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 compare Tesla’s substantial cash position with its free cash flow on a historical basis and see how its massive cash stockpiles have been able to cover the respective cash outflow.
For your information, Tesla’s free cash flow is derived from operating net cash minus capital expenditures and it is meant to measure Tesla’s net cash outflow or inflow.
Finally, we will explore the reason for the continuous upside 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 6 years from 2015 to 2021.
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 has 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 and long-term portion of restricted cash disclosed in the Q4 2020 financial statement:
As seen, Tesla has only a bit of restricted cash compared to its outsized cash & cash equivalents.
All told, Tesla’s cash on hand has basically been trending upward since 2015 and expanded incredibly since the beginning of 2020.
For example, Tesla has only $1.5 billion in total cash 6 years ago but the amount has since gone higher and reached more than $17 billion as of Q1 2021.
Why is Tesla racking up so much cash all these quarters?
It’s simply due to the capital-intensive nature of the automobile business.
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, how does it look when compared to the cash outflow?
Tesla’s cash outflow 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, including the construction of its Gigafactory all around the world.
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 for 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 or cash inflow discussed here.
The combination of these 2 cash activities, net cash from operations and capital expenditures, constitutes Tesla’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 net cash can be a positive or negative number, depending on whether Tesla’s business operations can generate a positive or negative operating net cash.
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 or inflow for the period from 2015 to 2021.
According to the chart, Tesla’s quarterly free cash flow has been mostly negative 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.
If you look closely, 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.
Nevertheless, Tesla’s free cash flow has improved over the years, particularly in recent quarters.
The worst has been over for Tesla in 2019 when Tesla managed to generate positive free cash flow in 3 consecutive quarters.
Also, despite being negatively 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.
As of 2021 Q1, Tesla’s free cash flow stood at $293 million, a year-over-year increase of more than 100%.
In short, all hope is not lost for Tesla as the company is free cash flow positive now.
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 in the quarterly plot and to better show you the trend in Tesla’s free cash flow.
From a TTM perspective, we can clearly see that Tesla’s free cash flow has improved by leaps and bounds.
Prior to 2019, Tesla’s TTM free cash flow had been entirely in the negative region in the chart.
From 2019 and onward, Tesla’s free cash flow has been positive and reached nearly $4 billion on a TTM basis as of Q1 2021, suggesting that the company’s business operations have got more efficient in terms of cash flow generation.
As of 2021 Q1, Tesla achieved a record high of $4 billion in free cash flow on a TTM basis, the 1st time the company has ever reported in its history.
Tesla’s record amount of positive free cash flow has been primarily driven by the unprecedented Model 3 and Model Y delivery throughout 2020.
Tesla’s Cash On Hand vs Free Cash Flow
I have combined both the cash reserves and free cash flow data into the same chart as shown above to see how Tesla’s cash has stacked up to its free cash flow.
According to the chart, Tesla’s cash on hand is multiple times higher than the free cash flow.
In other words, Tesla’s cash position has been more than enough to cover the free cash flow even when it was at a deficit in some of the quarters.
Although Tesla’s free cash flow plunged to -$1 billion in some quarters, its cash reserves were more than sufficient to cushion the shortfall.
On a long-term basis, we see that Tesla has been having more cash than it has consumed in the last 6 years.
In fact, Tesla’s cash position started to balloon when its free cash flow turned positive in recent quarters.
Going forward, Tesla most likely 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.
Therefore, other than cash, Tesla also holds digital assets such as bitcoins as a form of liquid asset.
By the end of 2021 1Q, Tesla’s $1.5 billion investment in bitcoins has swelled to nearly $2.5 billion even after it sold a portion of it that valued at $272 million.
While Tesla’s bitcoin fair market valuation has ballooned up to $2.5 billion by the end of 1Q 2021, the increment in market valuation does not add up to Tesla’s cash position.
The reason is that bitcoin is not treated as a form of cash asset according to accounting rules.
Instead, bitcoin is considered an indefinite-lived intangible asset under applicable accounting rules.
Additionally, accounting rules also do not permit any upward revision of Tesla’s bitcoin valuation for any market price increase until a sale occurs.
As such, Tesla’s bitcoin carrying value was only $1.33 billion by the end of 1Q 2021 while its fair market valuation was $2.5 billion in the same period.
Tesla’s Cash Flow from Financing Activities
While Tesla has been having positive free cash flow and has invested in bitcoins in recent quarters, the cumulative amount does not seem to be large enough to grow Tesla’s cash position to its current level.
For instance, Tesla’s cash reserves increased by more than 30% or $5 billion within a single quarter from 3Q20 to 4Q20.
However, Tesla produced only about $1.9 billion of free cash flow in 2020 Q4.
The numbers do not seem to add up.
Therefore, how did Tesla did it?
The answer can be found in Tesla’s net cash from financing activities.
The following chart depicts Tesla’s quarterly net cash from financing activities over the last 6 years from 2015 to 2021.
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 having positive net cash from financing activities in most fiscal periods.
Apparently, Tesla has been raising capital through either common stock offerings or debt issuings or both over the years.
To further illustrate, the snapshot below shows an example of 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 raised in 2020 Q4 was about $2.7 billion.
That said, Tesla’s swelling cash holdings all these years actually came from net cash from financing activities.
In other words, Tesla has been raising capital through external sources to maintain its outsized cash reserves all these years.
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.
However, Tesla does not include its bitcoin investment as part of its cash asset although the digital assets are highly liquid assets that can be sold within minutes.
As of 2021 1Q, Tesla’s total cash position, including cash and restricted cash, stood at $17 billion.
In the same quarter, Tesla’s bitcoin valuation carried a fair market value of nearly $2.5 billion.
With Tesla’s bitcoin investment included, Tesla has a total cash position of $19.5 billion.
Tesla has been having positive free cash flow, driven primarily by record Model 3 and Y deliveries in recent fiscal quarters.
Although Tesla continued generating positive free cash flow, the company still raised extra capital through external sources, including equity offerings and debt issuance as seen from the cash flow from financing activities.
As a result, Tesla’s swelling cash stockpiles have been primarily driven by capital raised through external sources instead of its own generated free cash flow.
References and Credits
1. Financial figures in all charts were obtained and referenced from Tesla’s 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.
Related Stocks That You May Like
Readers, investors, analysts, bloggers, visitors, researchers, writers, or academicians are highly encouraged to use, copy, quote, distribute, duplicate, modify, edit, upload, download, share and link any materials on this webpage such as the charts, snapshots, texts, paragraphs, etc. in your websites, research papers, essays and so on.
You can credit back to this page by a link or a mention of the website. Thanks for sharing!