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Does Tesla Operating Costs Compare Favorably With Sales?

A Tesla Model S cruising on a highway. Flickr Image.

As an investor myself, I am always interested in not only the operating expenses of a company but also would like to know how the operating expenses have performed with respect to revenue. With this said, we can derive a ratio by dividing the operating expenses or costs with respect to sales to track the trend of a company’s expenses over time.

From the cost over sales ratio, investors can find out how the operating costs have changed with respect to sales. The most important thing to look out for when analyzing the ratio would be to track the trend over a period of time. An increasing trend may imply that the costs of operation have gone out of control. On the other hand, a decreasing trend is almost always preferable.

For Tesla, the cost to sales ratio is the perfect metric to measure the company’s expenses against revenue due to the company’s significant increase in operating expenses in the past 5 years.

For your information, Tesla’s operating expenses are made up of R&D, SGA and restructuring expenses. For a detailed breakdown of Tesla’s operating costs, please visit this webpage: Tesla’s marketing expenses.

In this article, we will look at Tesla’s operating costs from the perspective of revenue and find out how Tesla has performed when it comes to controlling its expenses over the years.

Let’s take a look!

Tesla’s Operating Expenses (Quarterly)

Tesla operating costs

Tesla operating costs

Before diving into the ratio, let’s have a quick look at Tesla’s quarterly operating expenses from 2015 to 2020 which is shown in the above chart.

As seen from the chart, Tesla’s operating expenses have gone up quite significantly over the last 5 years. The company’s quarterly operating cost was less than $500 million back in 2015 but the figures have gone up to nearly $1 billion per quarter in 2020.

Besides, most of the growth in operating expenses occurred between 2015 and 2018. From 2018 onwards, Tesla’s operating expenses seem to be tapering down and has even declined slightly in 2020.

Tesla’s Operating Expenses (TTM)

Tesla operating costs (TTM)

Tesla operating costs (TTM)

On a trailing 12 months (TTM) basis, the company’s operating costs have, in fact, declined since 2019. As of 1Q 2020, Tesla’s TTM operating expenses were only $4 billion, representing a year over year decline of roughly 11%.

Looking only at the operating expenses chart may not tell us the big picture of how Tesla’s expenses have performed with respect to sales.

In the following chart, we will dive into the ratio of Tesla’s operating expense over revenue or sales ratio.

Let’s move on!

Ratio of Tesla’s Operating Expenses to Revenue (Quarterly)

Tesla operating expenses to sales ratio

Tesla operating expenses to sales ratio

The chart above shows Tesla’s operating costs with respect to revenue ratio from 2015 to 2020.

On a quarterly basis, the percentage has been on a declining trend over the shown period. Between 2015 and 2016, the ratio fluctuated around 40%. From 2016 onward, the ratio started to decline to around 30%.

Between 2018 and 2020, the ratio further declined and reached 15% as of 1Q20.

The decreasing trend implies that Tesla’s revenue is growing at a much faster pace than operating expenses. On the other hand, Tesla’s operating costs have also declined as seen from the prior chart.

The combination of significant revenue growth and decreasing operating costs have both fueled the decrease of the expenses to revenue ratio from 2015 to 2020.

Ratio of Tesla’s Operating Expenses to Revenue (TTM)

Tesla operating expenses to sales ratio (TTM)

Tesla operating expenses to sales ratio (TTM)

On a trailing 12 months (TTM) basis, the decreasing trend is much more obvious.

As of 1Q20, Tesla’s operating costs to sales ratio has dropped to a new low of only 15.4% on a TTM basis.

The declining ratio should bode well for Tesla’s investors as the combination of growing revenue and decreasing expenses would definitely lead to margin expansion and thus, result in greater profitability and cash flow for the company.

Tesla’s Operating Costs vs Sales (TTM)

Comparison of Tesla operating expenses and revenue

Comparison of Tesla operating expenses and revenue

The plot above shows the comparison between operating costs and revenue on a TTM basis.

The trend of both plots is very clear cut as shown in the chart above. Tesla’s TTM revenue has been on explosive growth and reached $25 billion as of 1Q20. In contrast, the operating costs have been roughly flat and have, in fact, declined slightly in 1Q20.

Conclusion

While Tesla’s total revenue has risen drastically over the years, the respective operating expenses have gone the opposite direction, and have, in fact, declined since 2019.

The increasing revenue and decreasing operating costs have both added to the declining of the ratio of operating expenses to revenue, implying that Tesla has managed to efficiently control its expenses without sacrificing sales revenue.

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References and Credits

1. All financial figures in this article were obtained and referenced from financial statements available in Tesla Stock Information.

2. Featured images were used under Creative Common License and were obtained from Automotive Rhythms and voyagevixen2.

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