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 within the current assets in the balance sheets.
As of 3Q 2021, Tesla’s inventory made up as much as 20% 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, the 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 of Tesla’s inventory with respect to current assets 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 provide us the 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 Q4 2020 financial statement:
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 are the largest component, making up more than half of the inventory levels.
Basically, finished goods is 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 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 into an individual item of the inventory.
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 they are the largest components, accounting for over 80% of the company’s total inventory values.
Tesla’s Inventory Levels
The plot above shows Tesla’s quarterly inventory levels for the period from fiscal 2015 to 2021.
According to the chart, Tesla’s inventory has been rising quite significantly in the last 6 years, hitting a record high at $5.2 billion as of Q3 2021.
The growth of Tesla’s inventory is a good indicator that the company is growing.
For your information, Tesla’s inventory is part of the company’s working capital which is similar to cash and other items under the current assets.
Therefore, when Tesla’s businesses expand, the company definitely needs more working capital to support the growth and the inventory is part of it.
In short, Tesla does not build out its inventory to such a massive level for no reason.
Tesla’s Inventory YoY Growth Rates
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 2021, Tesla’s inventory grew 23.3% year-on-year, a record figure in the last 3 years.
Tesla’s Inventory Breakdown
Tesla 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 2021, taking up as much as 45% of total inventory or $2.4 billion USD.
Tesla’s finished goods inventory which made up about 34% of the total inventory or $1.8 billion was the second-largest component in fiscal 3Q 2021.
Tesla’s work-in-progress inventory was the smallest component and contributed only 20% to total inventory or $1.3 billion as of Q3 2021.
Tesla’s raw materials inventory used to be much smaller than the finished good inventory.
However, the raw materials component has surpassed the finished goods in fiscal 2021, driven primarily by the strong demand for the company’s finished products, especially in the automotive segment.
While Tesla’s finished goods inventory has remained flat in fiscal 2021, raw materials and even the work-in-progress inventory have significantly ticked higher in the same fiscal year.
The significant rise in raw materials and work-in-progress inventory may have been caused by a slowdown in the conversion of these inventory components to finished products.
Therefore, we need to keep an eye on these inventory components in the coming quarters.
Ratio Of Tesla’s Finished Goods To Total Inventory
As shown in the chart above, Tesla’s finished goods to total inventory ratio has declined significantly in fiscal 2021.
As of Q3 2021, Tesla’s finished goods to total inventory ratio clocked at only 34%, a record low for the company.
As mentioned, Tesla’s finished goods or finished products inventory is a critical component as it relates to revenue generation.
If this part of the inventory level is too low, it may affect Tesla’s revenue or sales in the foreseeable future.
So keep an eye too on this ratio too.
Ratio Of Tesla’s Total Inventory To Current Assets
Similarly, Tesla’s total inventory to current asset ratio has been at a record low in fiscal 2021.
As of Q3 2021, Tesla’s total inventory to current asset ratio totaled only 20%.
This figure may sound reasonable as a high ratio can tie up a significant amount of working capital in inventory.
Therefore, Tesla’s total inventory to current asset ratio isn’t so bad at 20%.
Ratio Of Tesla’s Total Inventory To Revenue
Tesla’s inventory to revenue ratio has been on a decline and was at the lowest in fiscal 3Q 2021, reaching only 11% in the latest quarter.
The lower the ratio the better the efficiency is for Tesla’s inventory.
In other words, at a low ratio, Tesla needs only a small number of inventory to generate the same amount of sales.
As the inventory to revenue ratio has been on a decline in the last 6 years as shown in the chart, that means Tesla has been getting more efficient in managing the inventory.
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 respective 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’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 7.0X as of fiscal 3Q 2021.
At this ratio, Tesla is clearing its inventory at over 7.0X or 7 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
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 the 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 only 50 days as of fiscal 3Q 2021 as shown in the chart above.
At this ratio, Tesla uses only 50 days to clear out its products.
In other words, Tesla’s inventory is turning over at 7.0X or 7 times over a 1-year or 365-days period.
Tesla’s Finished Products Days Of Inventory
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 ram materials to work in progress and to finished goods.
Best of all, Tesla’s finished products 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.
To recap, Tesla inventory levels have grown significantly over the past 6 years from only $1 billion in 1Q15 to $5.2 billion in 3Q21. The growth in inventory essentially means that Tesla’s sales have been strong over this period.
There are 4 components in Tesla’s total inventory, with finished goods being the largest part of the inventory.
However, Tesla’s finished products inventory has decreased significantly in fiscal 2021 and its 1st place was overtaken by raw materials, showing that the company may have slowed down during the conversion of raw materials to finished products.
Investors should keep an eye on this ratio.
With respect to revenue, Tesla’s inventory grew at a slower rate and this has translated to a declining inventory to revenue ratio.
The declining ratio means that Tesla has been increasingly efficient at managing its inventory as less inventory is needed to generate the same number of sales.
Apart from the improving sales channel, Tesla’s inventory also has been clearing at an increasing speed as seen in the rising inventory turnover ratio.
Tesla took nearly 6 months to turn over its whole inventory in a 1-year or 365-day period.
As of fiscal 2021, this figure has declined to only 50 days in the latest quarter, indicating that the firm is increasingly better at managing its inventory.
References and Credits
1. All information including financial figures and all data in this article were obtained and referenced from Tesla SEC Filings.
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