Tesla’s inventory is one of the largest short-term assets in the balance sheet, totaling as much as 30% of current assets as disclosed in the 1Q 2020 quarterly filing.
The inventory will generate substantial future economic benefit in terms of revenue for Tesla. As a result, the inventory is an important figure that investor should pay attention to from quarter to quarter.
This article talks mainly about Tesla’s inventory levels and most topics covered here will be revolved around the comparison between Tesla and General Motors’ inventory and the respective ratios.
Although Tesla’s business model is different from General Motors in the sense that Tesla’s model is retailed based whereas General Motors is wholesale based, the comparison between the two major automakers’ inventories reveals a vast difference in some of the ratio such as days of sales and turnover ratio as well as those that relates to revenue and current assets.
Before going further into the detail of Tesla inventory levels and management efficiency as well as other variables such as inventory turnover ratio and days sales, let’s take a quick look at what makes up Tesla’s inventory.
What Makes Up Tesla’ Inventories
Tesla’s inventory basically consists of the following components:
- 1. Raw materials
- 2. Work in progress
- 3. Finished goods
- 4. Service parts
Here is a snapshot of the inventory components disclosed in the Q3 2019 quarterly statement:
Finished goods has always been the largest component among all the inventories as you will see in the following series of charts. Basically, finished goods is made up of the following items:
- 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 and the service part is actually part of the finished good except that Tesla has separated this group out of the vehicles 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 cost of revenues as stated in its quarterly financial reports.
I would pay particular attention to the “Finished Goods” inventory since it’s the largest component, accounting for more than half of total inventory and is closely related to sales revenue.
Chart of Tesla’s Inventory Levels
The plot above is created to show Tesla’s quarterly inventory levels for the past 5 years from 2015 to 2020.
As the chart shows, the long-term trend indicates that Tesla’s inventory level has been on a rise between 2015 and 2020, hitting record high in Q1 2020 at $4.5 billion. While Tesla posted record inventory level in 1Q 2020, the absolute value is still less than twice the number recorded by General Motors which was slightly more than $10 billion as of 4Q 2019.
Nevertheless, the remarkable growth in Tesla inventory over the past 5 years signifies the overall growth of the company which has resulted in the expansion of the company’s working capital.
Furthermore, when Tesla increases its inventory at this rate, it means only one thing: there is demand for its products. I don’t see other reason for Tesla to keep expanding its inventory except that the company knows there is demand for its products.
In short, Tesla will not be continuously increasing its inventory to such a massive amount for no reason.
Chart of Tesla’s Inventory YoY Growth
The chart above shows Tesla’s inventory year over year (YoY) growth between 2016 and 2020.
Basically, the growth rates for the past 5 years have been in line with what we saw in the inventory chart in prior discussion. The significant growth of the company’s inventory levels has resulted in positive growth rates for all quarterly results as seen in the current chart.
While growth has been significantly higher between 2016 and 2018 as seen from the figures which have been consistently above 20%, Tesla’s inventory growth has been slowing down in recent years especially in 2019 when the company posted single digit growth rates of only 1.7% and 8.1% in 2Q and 3Q 2019 respectively.
Nonetheless, Tesla still recorded a YoY growth rate of 17% for its inventory in 1Q 2020, which was still pretty remarkable compared to General Motors which recorded a YoY growth rate of only 5.9% in 4Q 2019.
Chart of Tesla’s Inventory Components
To see what really makes up Tesla’s inventory, I have created the chart above to show the breakdown of the inventory into different components.
As seen from the chart, Tesla inventory consists of 3 parts: (1) raw materials, (2)work in progress, and (3) finished goods. I have combined the finished goods together with the service parts as both of them are basically in the same category which is the finished goods inventory.
Without doubt, the largest of the inventory has always been the finished goods between 2015 and 2020, making up as much as 50% of total inventory in 1Q 2020. The raw materials inventory which made up about 37% of total inventory was the second largest component in 1Q 2020.
Work in progress inventory has been the smallest component over the past 5 years and it made up about 10% of total inventory in 1Q20.
Between 2015 to 2020, we are seeing an uptrend for all 3 inventory components over the past 5 years and all of them have reached record high as of 1Q 2020. The uptrend has been specifically significant for raw materials during 2019 in which we are seeing a near parabolic rise throughout the year.
In general, the finished goods component is the most crucial part of the inventory as this asset directly relates to revenue generation. As such, it makes sense for Tesla to have roughly 50% of total inventory coming from this component.
Ratio of Tesla’s Finished Goods to Total Inventory
The chart above shows the ratio of finished goods to total inventory expressed in percentage.
As stated before, finished goods has been the largest inventory component for the past 5 years, hovering between 45% to 65% of total inventory from 2015 to 2020. This ratio is almost identical to the one seen in General Motors in which the ratio has been slightly higher at about 55% in 4Q 2019. In Tesla’s case, the ratio was slightly above 50% in 1Q 2020.
I believe the percentage is quite reasonable. For example, a figure that is above 70% may indicate an imbalanced inventory in which there is an excess of finished goods or the company is simply having difficulty in clearing off the excess finished goods.
On the flip side, if the finished good is less than 30% of total inventory, it may point to an overstocked of raw materials with respect to finished goods, resulting in lost revenue.
The results in the chart illustrate the consistency of Tesla finished goods with respect to total inventory over the past 5 years. During 2019, Tesla’s finished goods inventory came down steadily when it hit the 65% level in 1Q19 and bounced off the low at 50% in 1Q20.
The ratio shows that Tesla has been quite efficient in managing its finished goods inventory throughout the period. In this aspect, the company can somewhat accurately predict the demand for its product, thereby leading to a small fluctuation of the finished goods inventory. This is evidenced by the tightly swung ratio which has been no more than 20% from 2017 to 2020.
All in all, Tesla has been having quite a balanced inventory in which the finished goods and the rest of the components being almost equally divided from 2015 to 2020.
Looking at just the inventory and its respective components alone may not tell us the big picture. To further illustrate, I have created a few more charts below that shows how Tesla inventory changes with respect to current asset and revenue over several quarters.
Ratio of Tesla’s Inventory Levels to Current Asset
The chart above is created to show the amount of inventory tied up in current asset expressed in percentage. We know that current asset equals working capital. From the chart above, we can find out how much inventory is tied up as working capital.
Of course the lower the ratio, the better the liquidity is as less working capital is tied up in inventory. Inventory is a somewhat liquid asset but not as liquid as cash and cash equivalents. Therefore, if too much inventory is tied in current asset and when slowing sales hit the company, the company may run into cash flow problem.
From the chart above, Tesla’s ratio of inventory to current asset seems to be on the high side, especially during 2018 when the ratio reached 50% current assets which means as much as half of Tesla’s working capital was in inventory. The reason for the high ratio may have been primarily due to the ramp of Model 3 in 2018.
Nevertheless, the ratio declined slowly during 2019 and inventory reached the lowest ratio at 30% of current assets by Q1 2020.
Comparing this figure with that of GM which was in the 15% range, Tesla’s ratio was more than twice the number of GM.
Therefore, Tesla seems to be keeping too much inventory with respect to current assets comparing to that of General Motors. The gap that appeared between Tesla and GM may have something to do with the difference in business model. As stated before, Tesla’s model is retail based whereas GM’s model is wholesale based.
My best guess is that retail based business model may require the stocking of more inventory with respect to current assets compared to that of a wholesale business model. On the other hand, it can simply mean that the retail based model is slower in clearing off its inventory compared to the wholesale based model.
Well, this will not be an issue as long as Tesla can manage its inventory effectively and the conversion cycle of inventory to sales is not disrupted.
Ratio of Tesla’s Total Inventory to Revenue
To find out how efficient Tesla generates revenue with respect to inventory, I have created the chart above to show the ratio of inventory to revenue expressed in percentage.
This ratio measures the amount of inventory used to generate sales and it should be compared with that of other automakers such as GM to determine its relative efficiency.
In this aspect, the higher the ratio, the less efficient Tesla is in terms of generating sales because more inventory is needed to arrive at certain amount of sales.
As seen from the plot, the ratio had been more than 100% during 2015 which means Tesla’s inventory was greater than the quarterly revenue in the same period. However, the ratio has declined steadily over the 5-year period, and dropped to its lowest level at around 60% in Q3 2019 before trending slightly higher to 80% in Q1 2020.
The downward trend illustrates that Tesla has improved its efficiency in managing its inventory to generate sales. In other words, Tesla was using less inventory to generate the same amount or higher revenue. This is actually a good trend as less inventory means less money is tied up in working capital.
Comparing this figure with that of GM, Tesla inventory ratio with respect to revenue is still on the high side. For GM, its latest figure shows that its inventory to sales ratio was only 35% in 4Q19 which means GM used far less inventory to generate the respective revenue.
So Tesla’s ratio is nearly twice as much as that of General Motors. Again, the difference may have been attributed to the difference in business model. A retail based business model may require more inventory with respect to revenue or another explanation is that GM is simply more efficient than Tesla when it comes to inventory management.
Tesla’s Inventory Turnover Ratio
We have seen that Tesla has been improving its sales efficiency with respect to inventory. We are now checking on the inventory turnover ratio which measures the speed at which Tesla clears off its inventory in a period of time.
The chart above shows the quarterly inventory turnover ratio which is derived from the following equation:
Inventory turnover ratio = Cost of goods sold / closing inventory
Consistent with Tesla improving sales efficiency as shown in the previous chart, Tesla inventory turnover ratio has also been improving which can be seen from the rising figures in the current chart.
In 2015, Tesla’s quarterly inventory turnover ratio was only 0.60. This figure means that Tesla managed to turn its inventory over at less than 1 time in a quarter. For example, it takes Tesla more than a quarter to clear off its existing inventory before the new batch comes in.
However, the ratio has improved tremendously over the years and reached slightly above 1.0 in 1Q 2020. At a quarterly ratio of 1.0, Tesla managed to clear the inventory about 1 time in a quarter.
Comparing this figure with that of GM, Tesla has a lot of catch up to do. GM’s inventory turnover ratio was more than twice of Tesla’s number, meaning that GM managed to replace its inventory at twice the speed of Tesla.
Again, the difference could be due to the business model adopted by Tesla and GM respectively. In short, GM whose business model is based on the wholesale concept, may be far more efficient in clearing off its inventory and as seen, is at twice the speed of retail business model which is currently adopted by Tesla.
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 inventory turnover ratio. As seen from the chart, the figure is expressed in number of days.
Consistent with inventory turnover ratio, Tesla days sales in inventory in 2015 was the worst because the company took more than 140 days to replace its inventory in a quarter. In this aspect, Tesla essentially took more than a quarter to sell its inventory before being replaced by new stocks.
Similar to inventory turnover ratio plot, the days sales in inventory has also been improving especially in recent years. You can see from the chart in 1Q 2020, Tesla managed to clear its inventory in only 60 days as opposed to 140 days back in 2015.
Tesla’s Finished Products Days of Inventory
An industry standard that has been used by automakers in measuring inventory turnover is the days of inventory for finished products. The finished products here refers to new vehicle inventories in general.
The formula used to calculate the days of inventory is shown as below:
Days of inventory for finished products = (new car inventory / trailing deliveries ) X 261 working days
(Source: automotive news)
For quarterly calculation, I have slightly modified the above equation to 65 days instead of 261 days. I have also replaced the new car inventory with finished products inventory which can easily be obtained from financial statements and it includes not only new vehicles but also used vehicles as well as service parts.
As the chart shows, Tesla’s finished products days of inventory hovered between 30 and 45 days over the past 5 years and the average value was around 37 days.
Comparing this figure with that of total inventory, the finished products days of inventory has been in much better shape and was roughly less than twice the figure of total inventory for the 1Q 2020 quarter. In other words, finished product inventory is replaced at twice the speed of total inventory.
However, Tesla’s finished goods days of inventory ratio has been sort of flat between 2015 and 2020 whereas total inventory days of sales has improved significantly over the same period.
Comparing this figure with that of General Motors, Tesla’s finished goods days of inventory was more than twice of GM’s figure which means GM sold off its finished goods inventory at more than twice the speed of Tesla.
To recap, Tesla inventory levels have grown significantly over the past 5 years from only $1 billion in 1Q15 to $4.5 billion in 1Q20. The growth in inventory essentially means that sales have been strong over this period.
There are 4 components that make up total inventory, with finished goods being the largest part of the inventory. The finished goods as a percentage of inventory ratio shows that Tesla has been effective in managing the inventory as the ratio had been relatively consistent (between the 50% and 60% level) over the past 5 years.
With respect to current asset, Tesla keeps a reasonably large inventory at about 30% of current asset. A very large inventory can tie up working capital and makes the company vulnerable to declining demand. When sales got hit, Tesla’s liquidity might be severely affected as the conversion of inventory to cash will slow down.
Also, Tesla’s total inventory with respect to revenue was more than twice of that of GM for the 1Q 2020 quarter, which means Tesla needed twice the inventory to generate the same sales.
Overall, Tesla inventory management has steadily improved as seen from some of the improving ratio discussed above. Although Tesla is getting more efficient in managing its inventory, there is still room for improvement. Relative to the ratios of other automakers such as GM, Tesla still has a lot of catch up to do.
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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