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How Efficient Has Tesla Been Managing Its Inventory?

A Tesla sale office. Flickr Image.

This article tracks Tesla’s inventory as disclosed in the company’s balance sheets.

For your information, Tesla’s inventory is a short-term asset and is disclosed as current assets in the balance sheets.

As of 3Q 2022, Tesla’s inventory made up nearly 30% of the company’s total current assets, making it the 2nd largest component after cash and cash equivalents.

That said, Tesla’s inventory will generate substantial future economic benefits for the firm.

As a result, inventory is an important figure that investors should pay attention to from quarter to quarter.

Apart from the inventory levels, this article also looks at the relationship between Tesla’s inventory and revenue over a period of time.

This relationship tells us about how Tesla’s inventory has changed with respect to other variables such as current assets and revenue.

In addition, we also look at some ratios such as the inventory turnover ratio and the days of inventory which give us information about the health of Tesla’s inventory.

Let’s take a look!

What Makes Up Tesla’s Inventory

Here is a snapshot of Tesla’s inventory breakdown as disclosed in the 2021 annual statement:

Tesla inventory components - 2021 4Q

Tesla inventory components – 2021 4Q

Tesla’s inventory basically consists of the following items:

  • 1. Raw materials
  • 2. Work in progress
  • 3. Finished goods
  • 4. Service parts

Among all items, the finished goods is usually the largest component, making up more than half of the inventory levels.

Basically, finished goods are made up of the following products:

  • 1. Vehicles in transit to fulfill customer orders
  • 2. New vehicles available for immediate sale at retail and service centers
  • 3. Used Tesla vehicles
  • 4. Energy storage and solar roof products

The rest of the inventory components are pretty much self-explanatory.

The service part is a part of the finished goods inventory but Tesla breaks it down to show the valuation.

The raw materials inventory is another important inventory component and is nearly as big as the finished goods inventory.

Tesla writes down inventory for any excess or obsolete inventories or when the company believes that the net realizable value of inventories is less than the carrying value. The impact of the inventory write-down will be in the cost of revenues as stated in its financial reports.

Of all inventory components, I would pay particular attention to the “Finished Goods” and “Raw Materials” inventory as these are the largest components, accounting for over 80% of the company’s total inventory values.

Tesla’s Inventory Levels

Tesla quarterly inventory

Tesla quarterly inventory

* Tesla’s inventory is a GAAP measure and is obtained from the company’s consolidated balance sheets.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The plot above shows Tesla’s quarterly inventory levels for the period from fiscal 2015 to 2022.

According to the chart, Tesla’s inventory has been rising quite significantly in the last 8 years, hitting a record high at more than $10 billion as of Q3 2022.

Tesla’s expanding inventory is a good indication that the company is growing.

For your information, Tesla’s inventory is part of the company’s working capital and is similar to cash as well as other current assets.

Therefore, when Tesla’s businesses expand, the company definitely needs more working capital to support the growth and thus, the growth of the inventory as the company expands.

In short, Tesla does not build out its inventory to such a massive level for no reason.

Tesla’s Inventory YoY Growth Rates

Tesla inventory YoY growth rates

Tesla inventory YoY growth rates

* Tesla’s inventory YoY growth rates are calculated by the author based on the company’s quarterly inventory levels.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

In terms of year-on-year growth rates, Tesla’s inventory has been rising as seen in all the positive figures in the chart above.

There was only 1 quarter in which Tesla’s inventory experienced a decline year-over-year and that was in fiscal 1Q 2021.

In fiscal 3Q 2022, Tesla’s inventory nearly doubled year-on-year, the highest recorded growth rate since 2015.

Tesla’s Inventory Breakdown

Tesla total inventory breakdown

Tesla total inventory breakdown

* Tesla’s inventory breakdown is a GAAP measure and is provided by the company under the financial notes.
* Finished goods inventory is combined with service parts to form a single category.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Tesla’s inventory consists of 3 parts: (1) raw materials, (2)work in progress, and (3) finished goods.

Of all components, Tesla’s raw materials inventory came in at the largest portion as of fiscal Q3 2022, taking up more than 50% of total inventory or $5.4 billion USD in terms of valuation.

Tesla’s finished goods inventory which made up about 20% or $2.1 billion of the total inventory came in as the 3rd-largest component in fiscal 3Q 2022.

This category was once the largest component but had become much smaller over time.

The work-in-progress inventory was the 2nd largest component and contributed about 22% or $2.2 billion to total inventory as of Q3 2022.

Tesla’s raw materials inventory used to be a much smaller component but had become the largest inventory component in 3Q 2022.

As of Q3 2022, the raw materials exceeded $5 billion in monetary value, making it the largest component in the latest quarter.

While Tesla’s finished goods inventory has increased in fiscal 2022, raw materials and work-in-progress inventories have increased at a much faster pace.

The significant rise in raw materials and work-in-progress inventories may have been caused by a slowdown in the manufacture of these inventory components to finished products.

On the other hand, the management may be expecting a surge in demand for the company’s products in the future and thus, a massive rise in raw materials and work-in-progress inventories as of 2022.

In short, we need to keep an eye on these inventory components in the coming quarters.

Ratio Of Tesla’s Finished Goods To Total Inventory

Tesla finished goods to total inventory ratio

Tesla finished goods to total inventory ratio

* Ratio is calculated by the author based on the company’s quarterly inventory levels.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

As shown in the chart above, Tesla’s finished goods to total inventory ratio has been on a decline since 1Q 2021.

As of Q3 2022, Tesla’s finished goods to total inventory ratio clocked at only 26%, one of a record low for the company.

As mentioned, Tesla’s finished goods or finished products inventory is an important current asset that relates to revenue generation.

If the level of this specific inventory is too low, it may affect Tesla’s revenue or sales in the foreseeable future as the trend may increase the backlog, thus, delaying product delivery.

So keep an eye too on this ratio.

Ratio Of Tesla’s Total Inventory To Current Assets

Tesla total inventory to current assets ratio

Tesla total inventory to current assets ratio

* Ratio is calculated by the author based on the company’s quarterly inventory levels.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Similarly, Tesla’s total inventory to current asset ratio has been on a decline since 2021.

As of Q3 2022, Tesla’s total inventory to current asset ratio totaled nearly 30%, a much higher figure compared to that reported in early 2021.

This figure is still moderately low compared to historical averages.

A high ratio does not bode well for the company as too much inventory can tie up a significant amount of working capital.

Therefore, Tesla’s total inventory to current asset ratio isn’t so bad at 30% as of 3Q 2022.

Ratio Of Tesla’s Total Inventory To Revenue

Tesla total inventory to revenue ratio

Tesla total inventory to revenue ratio

* Ratio is calculated by the author based on the company’s quarterly inventory levels and TTM revenue.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Another ratio worth taking a look at is the total inventory to revenue ratio.

As seen, Tesla’s inventory-to-revenue ratio has been on a decline and was at one of the lowest as of fiscal 3Q 2022, reaching only 14%.

That said, the lower the ratio the better the inventory management is for Tesla.

In other words, at a low ratio, Tesla needs only a small amount of inventory to generate the same number of sales.

This trend is favorable for Tesla as it not only reduces warehouses but also saves working capital.

Therefore, Tesla has been getting more efficient in managing its inventory as reflected in the declining ratio.

Another trend worth mentioning is that while Tesla’s inventory has been rising, its revenue or sales rise even faster compared to the inventory and thereby, driving down the ratio.

The favorable trend is a good indicator that Tesla is getting better at generating sales with as little inventory as possible.

Tesla’s Inventory Turnover Ratio

Tesla inventory turnover ratio

Tesla inventory turnover ratio

* Ratio is calculated by the author based on the company’s quarterly inventory levels and TTM costs of revenue.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

Tesla’s inventory turnover ratio is derived from the following equation:

Inventory turnover ratio = TTM Cost of goods sold / Closing inventory

According to the chart above, Tesla’s inventory turnover ratio has been increasing which means the company has been clearing products at an increasing speed.

For example, Tesla could only deliver 2 product cycles in fiscal 2015 as seen in the inventory turnover ratio of 2.0X.

This figure has risen to as much as 5.0X as of fiscal 3Q 2022.

At this ratio, Tesla managed to clear its inventory at 5.0X or 5 times in a year.

Therefore, Tesla is clearing its products at a much faster pace now compared to 5 years ago.

Tesla’s Days Of Inventory Ratio

Tesla days of inventory

Tesla days of inventory

* Ratio is calculated by the author based on the company’s quarterly inventory levels and TTM costs of revenue over 365 days.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The days of inventory ratio is similar to the inventory turnover ratio in the sense that it’s the inverse of the inventory turnover ratio.

As seen from the chart, the figure is expressed in number of days.

Consistent with the inventory turnover ratio, Tesla’s days sales in inventory has been on a decline, indicating that the company is using less time to clear out its products.

For example, Tesla took nearly 170 days to clear its inventory over a 1-year period back in fiscal 2015.

This figure has declined to slightly over 60 days as of fiscal 3Q 2022 as shown in the chart above.

At this ratio, Tesla uses about 60 days to turn over its products.

In other words, Tesla’s inventory turnover is roughly at 5.0X or 5 times over a 1-year or 365-day period.

Tesla’s Finished Products Days Of Inventory

Tesla finished goods inventory days

Tesla finished goods inventory days

* Ratio is calculated by the author based on the company’s quarterly finished goods inventory and TTM costs of revenue over 365 days.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

If we look at only Tesla’s finished goods inventory, the company is clearing them at a much faster pace.

For example, in the chart above, Tesla managed to deliver its finished products in only 20 days compared to 50 days for the total inventory which ranges from raw materials to work-in-progress and to finished goods.

Best of all, Tesla’s finished product days of inventory also has been decreasing in the last 6 years, meaning that the company also has been clearing its finished goods at an increasing speed.

Conclusion

A couple of red flags are that Tesla’s raw materials have been increasing and were at a record high as of 3Q 2022.

Similarly, the finished-product inventory also has been rising and was at a record high in the latest quarter.

However, a relief here is that the work-in-progress inventory also has been growing and also was at a record high as of 3Q 2022, an indicator that may represent customer orders that need to be fulfilled.

While Tesla’s inventory management has been increasingly efficient, the inventory turnover and days of inventory ratios have started to reverse as of 3Q 2022, illustrating a slight decline in the company’s inventory efficiency.

However, these ratios were still relatively low compared to historical averages and should not be a concern as of now.

The final words are that investors should keep an eye on these numbers from time to time.

References and Credits

1. All information including financial figures and all data in this article were obtained and referenced from Tesla SEC Filings.

2. Featured images in this article are used under creative commons license and sourced from the following websites: 8000vueltas and e-connected.

Top Statistics For Your Reference

Disclosure

The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.

If you find the information in this article helpful, please consider sharing it on social media and also provide a link back to this article from any website so that more articles like this one can be created in the future. Thank you!

{ 1 comment… add one }
  • Deborah January 15, 2020, 6:17 pm

    An inventory checklist is always important to an interlining supplier. This checklist will help interlining suppliers understand how many raw materials they need to orders for the interlining products such as woven interlining, non-woven interlining and fusible interlining. However, the level of inventory to be ordered is not the same in each ordering period. You should pay attention to the market change in the interlining industry.

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