Tesla Debt To Equity Ratio, Capital Structure And Leverage

A Tesla factory in Fremont, CA. Source: Flickr

This article presents the debt-to-equity ratio and capital structure of Tesla (NASDAQ: TSLA).

The debt-to-equity ratio determines the extent of debt financing relative to equity. It is used to evaluate the leverage of a company and assess its financial risk.

On the other hand, the capital structure assesses how a company finances its operations, whether through debt, equity, or a combination of both.

Ideally, a company’s capital structure should be balanced between debt and equity, such that the debt-to-equity ratio is 1:1.

However, most companies have an unbalanced debt structure – having either too much debt or too much equity financing.

Excessive debt may increase default risk, while too much equity financing may dilute ownership and be more costly.

This article explores Tesla’s debt leverage and how it funds its operations, whether by debts, equity, or both.

Please use the table of contents to navigate this page.

Debt To Equity Ratio

As explained earlier, the debt-to-equity ratio is a measure for evaluating the debt leverage of a company.

When evaluating a company’s debt leverage, the debt-to-equity ratio shows the number of times the debt exceeds its equity.

A high debt-to-equity ratio typically suggests that a company has taken on a significant amount of debt in relation to its equity.

That said, the equation to calculate the debt-to-equity ratio is as follows:

Debt To Equity Ratio = Debt / Equity

The debt and equity can easily be obtained from a company’s balance sheets.

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Debt To Assets Ratio

The debt-to-assets ratio is a financial metric that assesses the proportion of a company’s assets financed by debt.

It measures the extent to which a company relies on borrowed funds to finance its operations and evaluates the capital structure of the company.

That said, the equation to calculate the debt-to-assets ratio is as follows:

Debt To Assets Ratio = Debt / Total Assets

Again, the debt and total assets can easily be obtained from a company’s balance sheets.

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Tesla’s Equity

Tesla’s total equity consists of shareholders’ equity and minority interest equity.

Two types of equities appear in the balance sheets because Tesla is a holding company of multiple subsidiaries.

Tesla’s balance sheet is consolidated with the assets and liabilities of all subsidiaries.

The consolidation has led to minority interests because Tesla does not own 100% of some subsidiaries.

The following snapshot illustrates Tesla’s non-controlling or minority interest in the balance sheet.

Tesla minority interest

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The reason for Tesla’s minority interest is because of the way the company’s ownership is structured.

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Tesla’s Debt

Tesla’s debt consists of interest-bearing borrowings and leases.

Interest-bearing borrowings refer to various forms of debt financing, such as issued bonds, credit and loan facilities, asset-backed notes, and cash-equity debt.

On the other hand, leases include operating leases and finance leases.

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How Does Tesla Use Its Debt

Tesla uses its debt to finance its operations and growth initiatives. The company has raised billions of dollars through debt offerings, including convertible bonds and senior notes, to fund its expanding production capabilities, research and development efforts, and acquisitions.

This approach allows Tesla to raise capital without diluting the ownership stake of existing shareholders. However, it also increases the company’s debt load and interest expenses, which could affect its financial performance and credit rating.

Despite these risks, Tesla has managed to maintain its debt levels within manageable limits and has even paid off some of its debt obligations in recent years.

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Total Debt – With Leases

tesla-debt-with-leases

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With operating and finance leases included, Tesla’s total debt measured US$10.6 billion as of 4Q 2023, almost double the US$6.3 billion a year ago. Investors concerned with Tesla’s $10 billion debt may find more information on this page: does Tesla have debt problem.

Although Tesla’s debt had decreased after peaking at over $16 billion in fiscal year 2020, it began to rise again in 2023.

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Total Debt – Without Leases

tesla-debt-without-leases

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Without leases, Tesla’s debt is considerably lower.

As of 4Q 2023, Tesla’s debt, excluding operating and finance leases, measured only US$4.7 billion. Although total debt is much less without leases, it is still up by over 100% from a year ago.

A significant trend is the decrease in Tesla’s debt after peaking at over $13 billion in 2020. As seen, Tesla’s debt has dramatically decreased since 2020, primarily due to the company’s aggressive debt extinguishment.

However, Tesla’s debt has risen again since 2023.

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Debt To Equity Ratio – With Leases

tesla-debt-to-equity-ratio-with-leases

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Tesla’s debt-to-equity ratio has considerably declined since 2015, even after adding operating and finance leases.

As shown in the chart above, Tesla’s debt-to-equity ratio measured only 0.2X as of 4Q 2023, roughly in line with the quarter a year ago but far lower than in 2015.

The low debt-to-equity ratio indicates that Tesla’s total debt, including operating and finance leases, comprises only a fraction of the company’s equity.

Therefore, Tesla’s debt does not appear to be a concern because the leverage is insignificant, even after significantly increasing in 2023.

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Debt To Equity Ratio – Without Leases

tesla-debt-to-equity-ratio-without-leases

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Without adding leases, Tesla’s debt-to-equity ratio is significantly lower.

The plot shows that Tesla’s debt-to-equity ratio measured only 0. lX as of 4Q 2023, a record low since 2015.

Again, the low debt-to-equity ratio shows that Tesla has no leverage issue.

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Total Liabilities To Equity Ratio

Tesla total liabilities to equity ratio

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As of 4Q 2023, Tesla’s total liabilities were only 70% of its equity, or 0.7X. This is the lowest ratio that Tesla has recorded since 2015.

The low ratio means that Tesla’s equity surpasses its total liabilities. In simpler terms, if Tesla needs to pay off all its liabilities, it can do so with its equity.

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Long-Term Liabilities To Equity Ratio

Tesla long-term liabilities to equity ratio

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Tesla’s long-term liabilities include long-term debt, operating leases, deferred revenue, warranty reserve, etc.

Tesla’s total long-term liabilities comprised only 0.2X or 20% of its equity, a significantly low ratio. In short, Tesla carries more equity than its long-term liabilities, which the company can pay off if needed.

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Total Debt To Assets Ratio

Tesla total debt to assets ratio

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Another ratio worth looking at is Tesla’s debt-to-asset ratio, as presented in the chart above.

The debt-to-asset ratio evaluates Tesla’s debt structure or capital structure.

Tesla’s latest debt-to-asset ratio measured only 10.0%, up slightly from 7.6% a year ago but considerably lower than previous highs. This ratio indicates that Tesla’s debt, including leases, comprised only 10% of the company’s assets.

Simply put, Tesla’s debt-funded assets comprise only a tiny portion of its total assets. Tesla used to have a high debt-to-assets ratio, topping 60%. However, this ratio has significantly declined in recent years.

Tesla’s decreasing ratio indicates a shift from debt financing to equity financing.

In short, Tesla now uses less debt and prefers equity-based financing due to the company’s surging profit and positive free cash flow.

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Total Liabilities To Assets Ratio

Tesla total liabilities to assets ratio

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Tesla’s capital structure was 40% liabilities and 60% equity as of 4Q 2023.

Tesla used to have a high total liabilities to assets ratio, measuring as much as 90%. At a ratio of 90%, Tesla’s capital structure was almost entirely funded by liabilities, accounting for 90% of the total assets.

However, the ratio has significantly declined over the years and reached only 40% as of 2023 Q4, a record low since 2015.

The latest ratio indicates Tesla’s nearly balanced capital structure between debt and equity.

When Tesla’s share price surged and profit rose, it slowly restructured its capital to equity-based instead of debt-based, as it was cheaper and less risky to fund its expansion using its funds.

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Conclusion

Tesla has shifted from debt to using its funds for expansion due to surging profit and positive free cash flow. Tesla has slightly more equity than debt, meaning that the company is able to pay off all debt with its equity if it needs to.

As of 4Q 2023, Tesla encountered almost a balanced capital structure, with 60% of its assets in equity and the remaining in liabilities.

Please leave your comments below.

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References and Credits

1. All financial figures presented in this article were obtained and referenced from Tesla’s SEC filings, investor update letters, quarterly and annual reports, earnings reports, presentations, etc., which are available in Tesla Investor Relations.

2. Featured image was used under Creative Common Licenses and obtained from mangopulp2008 and Maurizio Pesce.

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Disclosure

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