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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 lifeline 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 in 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.

Therefore, just 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 as depicted in the chart above refers to highly liquid current assets, including cash and cash equivalents disclosed in the balance sheet.

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:

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 gone higher and reached more than $14 billion as of Q3 2020.

Why is Tesla racking up its cash position all these quarters?

It’s simply due to the capital-intensive nature of the automobile business. Basically, the automobile business is an asset-heavy operation that requires lots 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-expense and high-cost business environment often means 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, 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’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 opened were accounted as capital expenditures.

Be reminded that debts 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.

Tesla free cash flow (quarterly)

Tesla free cash flow (quarterly)

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 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 generated a positive free cash flow in 2 consecutive quarters in 2Q20 and 3Q20, respectively.

Particularly, Tesla’s free cash flow totaled close to $1.5 billion in 2020 3Q alone, indicating that the company is on track to positive free cash flow generation for the entire year of 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 clearly show 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 onward.

Between 2019 and 2020, Tesla’s free cash flow totaled $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 3Q, Tesla achieved a record high of nearly $2 billion in free cash flow on a TTM basis, a new record for the company since its inception.

Comparing Tesla’s Cash Reserve and Cash Outflow

Tesla cash on hand comparison with cash outflow

Tesla cash on hand comparison with 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 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.

During 3Q 2020, Tesla has a cash position of more than $14 billion sitting nicely in the banks.

In the same quarter, the company generated nearly $1.5 billion in free cash flow, leaving plenty of cash around for the next quarter and the rest of 2020 as well as 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.

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 its current level.

For instance, Tesla managed to raise its cash reserves by nearly 80% or $5 billion within a single quarter from 2Q20 to 3Q30.

However, Tesla produced only about $1.5 billion of free cash flow in 2020 Q3.

The numbers did not seem to add up.

How did Tesla manage to grow its cash on hand to $14 billion when the respective free cash flow was only $1.5 billion?

The answer can be found in cash flow from financing activities.

Basically, Tesla gets extra cash from financing activities, including issuing equity and borrowing more debts.

The following chart depicts Tesla’s quarterly cash flow from financing activities over the last 5 years from 2015 to 2020.

Tesla net cash from financing activities

Tesla net cash 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. ”

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:

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.

According to the chart, Tesla’s net cash from financing activities totaled as much as $4.5 billion in 2020 Q3.

The majority of that amount came from the $5.0 billion capital injection through equity issuance in the same quarter, according to the company’s 3Q 2020 quarterly filings.

With net cash of $4.5 billion obtained from financing activities, Tesla’s cash on hand of $14.5 billion reported in 2020 3Q seems to add up now.

As mentioned, Tesla generated about $1.5 billion in free cash flow in Q3 2020.

When you add them all up, the numbers tally with what’s reported in Tesla’s cash reserves.

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 $14.5 billion in Q3 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 in 5 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 $14.5 billion as of 2020 3Q.

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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