Analyzing Tesla Liquidity With Only 3 Ratios

Tesla Model 3 interior. Flickr Image.

Tesla’s liquidity is often a hot topic among not only investors but also vehicle owners.

Tesla could become bankrupt and go out of business when the company is no longer able to sustain its operations because of liquidity issues.

Even if Tesla does not go under in the worst scenario, it may get acquired or bought up by other companies at a low price, leaving investors with losses and vehicle owners with a product that has nowhere to go.

Therefore, liquidity often gets scrutinized by investors to determine the financial position of a company.

In this article, we will take a look at some of Tesla’s liquidity ratios, including those that evaluate the company’s short-term liquidity.

The most crucial liquidity ratios are as follows:

These ratios measure Tesla’s short-term liquidity – its ability to fulfill its commitments when they come due within a year.

If Tesla failed to meet these short-term commitments, it will be in a deep hole.

Without further ado, let’s check them out!

Current Ratio, Working Capital, And Acid Test Ratio (Quick Ratio)

Investors are often interested in the current assets and current liabilities when evaluating the short-term liquidity of a company.

Particularly, investors look at the current ratio, working capital, and acid test ratio which measure the short-term financial health of a company.

The current ratio is determined by dividing the current assets by the current liabilities and it’s a useful measure of the ability of a company to cover all the commitments that come due within a year.

Current ratio = Current assets / Current liabilities

Similarly, the working capital can be determined by subtracting the current liabilities from the current asset to arrive at a figure that measures how many short-term assets are left after accounting for all of the short-term liabilities.

Basically, working capital is the net current assets of a company.

For example, we can find out from the working capital ratio how much is left in current assets after all current liabilities are paid off.

Working capital = Current assets – Current liabilities

Lastly, the acid test ratio or quick ratio is similar to the current ratio except that it is a more refined calculation where non-liquid assets such as the inventory and prepaid expenses are excluded in the asset part of the equation.

The ratio indicates a company’s immediate ability to repay all current liabilities with current assets which are cash or near-cash forms.

Acid test ratio (quick ratio) = Current asset (only liquid assets) / Current liabilities

For Tesla, the current assets are made up of mostly cash and inventory.

On the other hand, its current liabilities are mostly made up of accounts payable, accrued liabilities, and the current portion of long-term debt and capital leases.

Tesla’s Current Ratio

Tesla’s current ratio

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Tesla’s current ratio has steadily risen since 2018 and reached 1.57X as of 1Q 2023, signaling the improving liquidity of the company.

What the latest ratio means is that Tesla’s current assets were 1.57 times higher than its entire current liabilities.

In other words, as of 1Q 2023, Tesla had sufficient liquidity to cover all liabilities that come due in a year.

A trend worth mentioning is that Tesla’s improving liquidity since 2018 has been a result of the company’s surging cash position over time.

As of 4Q 2022, Tesla boasted a cash position of nearly $20 billion which consisted of mostly cash and cash equivalents, digital assets, and investments.

Tesla’s Adjusted Current Ratio

Tesla’s adjusted current ratio

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Not all of Telsa’s current liabilities are equal.

Some require cash payments while some do not.

For example, Tesla’s current liabilities such as deferred revenue, customer deposits, and resale value guarantees do not affect the company’s immediate liquidity as cash has already been received upfront and products have already been delivered for these liabilities.

Also, these liabilities may not necessarily result in future cash payments.

Therefore, Tesla may not even need to pay a dime in the future for these liabilities.

For the reason mentioned above, we can safely adjust these liabilities to be excluded from the ratio measurement to reflect Tesla’s realistic liquidity.

As a result, Tesla’s current ratio is much higher when we exclude these particular liabilities.

As of 2023 1Q, Tesla’s adjusted current ratio was measured at 1.75X, which was much higher than the non-adjusted ratio.

Therefore, Tesla’s liquidity is much better than you would normally expect.

Tesla’s Working Capital

Tesla’s working capital

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As Tesla’s liquidity improved, Tesla’s working capital was at record highs.

As shown in the chart, Tesla’s working capital was measured at nearly $16 billion as of 1Q 2023, a record figure since 2015.

Tesla’s Adjusted Working Capital

Tesla’s adjusted working capital

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Similar to the adjusted current ratio, the adjustment for working capital is done at the current liabilities portion to reflect Tesla’s realistic liquidity.

On an adjusted basis, Tesla’s working capital improved tremendously, topping more than $18 billion as fiscal 2023 1Q.

Tesla’s Acid Test Ratio (Quick Ratio)

Tesla’s quick ratio

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As briefly mentioned at the start of the article, the acid test ratio is calculated by excluding certain semi-liquid assets, including inventory and prepaid expenses.

Without these particular items, Tesla’s current assets is made up of only highly-liquid assets such as cash and cash equivalents and accounts receivable.

Apart from inventory and prepaid expenses, we also removed restricted cash to see if Tesla’s liquidity still holds up.

On the liabilities side, we do not adjust any items when measuring the acid test or quick ratio.

As seen in the chart above, Tesla’s liquidity ratio drops below 1.0X in most periods when certain assets are excluded from the measurement, suggesting that Tesla’s cash or near-cash assets alone are not able to sufficiently cover all short-term liabilities.

As of 1Q 2023, Tesla’s acid test ratio or quick ratio totaled 0.93X, which was not that bad as the ratio was still at the borderline.

However, without the contribution from other assets, Tesla’s liquidity can decline significantly and the company may need to turn to debt to resolve its short-term commitments.

Tesla’s Available Credits And Unused Amount

Tesla available credit

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If Tesla does run into any liquidity problem, the company can always get help from the existing credit facilities.

As of 1Q 2023, Tesla had up to $5.2 billion of available credits under 2 credit facilities, namely the RCF Credit Agreement and the Automotive Lease-backed Credit Facilities as shown in the above snapshot.

The good part is that Tesla has not used any amount of available credits as of 1Q 2023 under these 2 credit facilities as highlighted in the snapshot above.

Of course, credit facilities are debt that needs to be paid back if the company ever performs any drawdown.

Compared to the company’s short-term liabilities of $27 billion, Tesla’s $5.2 billion of unused committed amount is a drop in the bucket.

However, if the company ever runs into any cash shortages, the available credits under the credit facilities are a quick solution.

Conclusion

To recap, Tesla’s liquidity held up pretty well as of 1Q 2023.

The company has enough resources to cover all short-term liabilities that come due within a year.

Apart from its own cash and near-cash assets, Tesla has up to $5.2 billion of unused credit facilities which can be drawn down at any time when the needs arise.

In short, Tesla’s near-term liquidity looks pretty solid and should not run into any payment defaults.

References And Credits

1. All financial data presented in this article were obtained and referenced from Tesla’s financial statements, SEC filings, earnings releases, annual reports, etc, which are available in Tesla Investor Relations.

2. Featured images in this article are used under creative commons license and sourced from the following websites: Thomas Hawk and Steve Jurvetson.

Disclosure

References and examples such as tables, charts, and diagrams are constantly reviewed to avoid errors, but we cannot warrant the full correctness of all content.

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