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Explaining Tesla Cash Position With Only 3 Charts

Tesla Gigafactory Shanghai. Source: Tesla Q3 2019 Update Letter

Tesla 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 have been making losses and thus having negative operating cash flows all these years, 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 been mostly 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 disclosed in the balance sheet and are used interchangeably in this article.

In this discussion, we will dig in to find out Tesla 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 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 dive in the reason of the upward trend of Tesla cash on hand. 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 Q3 2019. This is puzzling as the situation seems contradicting – negative free cash flow but ballooning cash reserve.

So sit tight and read on!

Chart of Tesla 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 2019.

Cash on hand here basically referred to highly liquid current asset 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 need to be held for more than 1 year. Here is what Tesla says 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 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 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 steadily grown and reached a staggering number of $5.5 billion as of Q3 2019.

As we all know, Tesla has been mostly unprofitable all these years but it seems like the company is still able to increase its cash reserve at such a significant rate. Before exploring the question of where and how Tesla get its cash, let’s find out the reason the cash reserve has increased over the years.

So why does Tesla need such a large amount of cash on hand? It’s simply due to the automobile business being a very high fixed-cost business. Not only does the company has 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 expansion.

This general high expenses business environment often means that Tesla needs a very large cash reserve to deal with its expanding business. For this reason, Tesla working capital or current asset has been increasing over the years. For the most part, as much as 50% of the company current asset is cash and cash equivalents as seen from the following snapshot.

Tesla q3 2019 current asset

Tesla current asset obtained from Q3 2019 quarterly report.

With an increasing working capital, it seems natural that Tesla cash reserve will also be increasing.

Chart of Tesla Free Cash Flow

Tesla free cash flow

Tesla free cash flow

While Tesla cash on hand 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 cash consumption or cash burn rate mainly comes from two items: (1)operating activities and (2)capital expenditures.

Operating activities are normal business operations that runs on operating cash flows. Operating cash flows are cash needed to run the day to day core operations of the business such as payroll, rental, leases, R&D expenses, advertising costs, equipment and plants maintenance as well as all sorts of other sales 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 outlay required to maintain and expand its business operations. Capital expenditures is treated as an investment rather than expenses. For example, the Gigafactory Shanghai China which was just opened in 2019 is part of Tesla capital expenditures.

When we combine operating cash flow and capital expenditures, we have the free cash flow. As such, free cash flow is 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 the business operations can generate a positive or negative operating cash flow. Sometimes a 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.

Moving forward, I have created the free cash flow chart above that basically depicts Tesla cash usage over the 5 year period.

As you can see, Tesla quarterly free cash flow from 2015 to 2019 has been mostly negative, meaning that it’s operating activities have not generated sufficient cash to covers its business operations and capex. In fact, Tesla core businesses — automotive and solar — had consumed more cash than it could bring in.

Combining Tesla Cash Reserve and Free Cash Flow

tesla multiple cash flow

Tesla free cash flow and cash on hand combined

When we combined the first chart of cash on hand with the second chart of free cash flow, it’s very obvious to notice which one is more than the other. In this aspect, Tesla cash on hand is obviously more than what Tesla had consumed in the same quarter. Though Tesla had negative free cash flow in some quarters, cash on hand has been more than enough to cover the shortfall.

Take for example, in Q3 2017 when Tesla had burned cash to the tune of $1.5 billion in operating cash flow and capital expenditure combined, its cash reserve still sat nicely at $3.7 billion. After the quarter, the $3.7 billion of cash on hand would be stashed away in bank and be used in the next quarter of Q4 2017.

In short, Tesla cash on hand or cash reserve has been adequate to cover the company cash consumption for the past 5 years. Judging from the trend in the chart, Tesla will most likely be able to do the same thing which is to have enough cash in the bank to pay for its business operations.

Tesla Cash Flow from Investing Activities

Tesla cash from financing activities

Tesla cash from financing activities

After all the discussion about Tesla cash on hand and free cash flow, where does Tesla actually get its cash from? This question emerged because Tesla free cash flow has been mostly negative but its cash stashed in bank seems to be expanding. When Tesla used more cash than it can generate, there is no way for the company to keep increasing its cash on hand from quarter to quarter which is what we saw in the beginning of the article.

Therefore, the answer lies in the cash flow from financing activities. Basically, Tesla gets most of its cash from financing activities.

According to investopedia, cash flow from financing activities in the cash flow statement 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 cash flow from financing activities chart above, you may notice that most quarters were cash flow positive. Apparently, Tesla has been raising capital through common stock offerings and debt issuance. To further illustrate, I have provided a snapshot below that shows Tesla capital raise through 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 example above, Tesla managed to raise as much as $8 billion of cash through a combination of common stock offering and debt issuance within the 9 months ended Sept 30, 2019.

Referring to the chart again, whenever cash came into the company in any quarter, Tesla cash on hand will go higher. Take for example the 2Q 2019 quarter, there was roughly a $2.1 billion of cash inflow. Over the chart of cash on hand, you can see that the cash has grown significantly from the prior quarter of $2.1 billion to $5 billion in 2Q 2019.

That alone was almost a $3 billion increment. Of course, the increment was not entirely due to the cash inflow from financing activities. If you see closely, you may notice that free cash flow in that quarter was roughly $600 million. So that almost adds up to the $3 billion of cash inflow from Q1 to Q2 2019.

Conclusion

Tesla cash on hand or cash reserves are highly liquid assets such as cash and cash equivalents. The amount has grown from $1.5 billion in Q1 2015 to $5.5 billion in Q3 2019. The growth is attributed to the expanding working capital requirement when the company is actively growing its business.

Tesla cash consumption can be derived from its historical free cash flow. Free cash flow is measured by deducting operating cash flow from capital expenditures. Tesla had been operating at negative free cash flow in most quarters from 2015 to 2019, indicating that the company has used more cash than it could bring in.

Tesla cash on hand is sufficient to cover its cash outflow, 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 reserve in the company balance sheet for the past 5 years.

Reference

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

2. Featured image was obtained from Marco Verch.

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