Tesla inventory is one of the largest current assets in the balance sheet, making up as much as 30% to 40% of total current asset.
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.
Before going further into the detail of Tesla inventory management efficiency and other variables such as inventory turnover ratio and days sales in inventory, let’s take a brief look at what constitutes Tesla inventory.
Here is a snapshot of where the inventory is located in the balance sheet:
Tesla Inventory and Its Components
Tesla inventory 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 in the financial statement:
Finished goods is the largest component of the inventory as seen from the snapshot above. It 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
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.
Chart of Tesla Inventory
The plot above is created to show Tesla inventory growth history for the past 5 years from 2015 to 2019.
The trend in the plot shows that inventory has steadily increased over the past 5 years, hitting a record high in Q1 2019 at almost $4 billion before dropping slightly to $3.5 billion in Q3 2019.
The remarkable growth in Tesla inventory also signifies the overall growth of the company, especially in terms of revenue since inventory directly links to sales.
Furthermore, when Tesla increases its inventory at this rate, it means only one thing: there is high demand for its products. I don’t see other reason for Tesla to keep increasing its inventory except that the company knows there is demand out there for its products.
In short, Tesla will not keep its inventory at such a massive amount for no reason.
Chart of Tesla Inventory Components
To see what really makes up the inventory, I have created the chart above to show the breakdown of the inventory into separate components.
As seen from the chart, Tesla inventory consists of 4 parts: (1) raw materials, (2)work in progress, (3)finished goods, and (4) service parts. Without doubt, the largest of the inventory goes to “Finished Goods”, making up as much as 50% of total inventory. The “raw materials” which makes up about 35% of total inventory is the second largest inventory component.
The “Work in Progress” and “Service Parts” are the smallest components and their combination makes up about 10% to 15% of total inventory.
Throughout the quarters from 2015 to 2019, the majority of the inventory growth came from “finished goods” and “raw materials” as seen from their respective plots above. This is expected as these two components alone make up over 85% to 90% of Tesla total inventory.
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 to have over 50% of total inventory consists of this component. As you will see in the next chart below, the “finished goods” component has been managed well by Tesla in terms of its proportion with respect to total inventory.
Ratio of Tesla 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 is the largest inventory component and as seen from the chart above, it has been almost always the largest component, hovering between 45% to 55% of total inventory throughout the quarters from 2015 to 2019.
I strongly believe that this figure is quite reasonable. For example, a figure that is above 80% may indicate that the company has problem clearing off its finished goods inventory, causing an inflated inventory.
On the other hand, if the finished good is 20% of total inventory, it may indicate that the company has miscalculated the demand for its product, resulting in lost revenue.
Moreover, Tesla percentage figure at slightly more than 50% is consistent with that of other automakers such as GM. In GM case, the ratio of finished goods to total inventory hovers around 60%. You can read about GM inventory ratio here: GM inventory management efficiency.
The above results also indicates the consistency of Tesla finished goods with respect to total inventory over the shown period. There have been no dramatic swing in the finished goods inventory especially in recent years in 2018 and 2019. The ratio shows that Tesla has been quite efficient 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 during 2018 and 2019.
All in all, Tesla has been able to efficiently manage its finished goods inventory and this has resulted in an effective conversion of the asset to sales.
Nevertheless, 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.
Ratio of Tesla Total Inventory 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 more liquidity Tesla would have as less working capital is tied up in the inventory.
From the chart above, the ratio of inventory to current asset seems to be a bit high, especially since 2018 when the ratio reached 50% in some quarters in 2018. With the ratio at 50%, it means half of Tesla working capital is in inventory.
Comparing this figure with that of GM which is in the 15% level, Tesla ratio seems to be on the high side.
At 50% level, any drop in demand for Tesla products would severely affect its working capital. As well all know, inventory is not as liquid as other current asset such as cash and cash equivalents.
Therefore, Tesla seems to be keeping too much of inventory with respect to current asset. Well, this may not be an issue as long as Tesla can keep selling its products and the conversion cycle of its inventory to sales can continue.
Ratio of Tesla 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 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 inventory was way more than its sales 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.
The downward trend tells us that Tesla is getting more and more efficient in utilizing its inventory to generate sales. In other words, Tesla is using less inventory to generate the same amount of or even more revenue.
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 efficiency is only 30%.
Tesla 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 = quarterly Cost of goods sold / average quarterly inventory
Consistent with Tesla improving sales efficiency as shown in the previous chart, Tesla inventory turnover ratio has also been improving. In 2015, the turnover ratio was only 0.60. This figure means that Tesla turned 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 in recent quarters in 2019. In Q3 2019, We are seeing a figure in the ballpark of 1.4 which means Tesla can successfully sell off its inventory more than 1 time per quarter.
Comparing this figure with that of GM, Tesla has a lot of catching up to do. GM inventory turnover ratio is almost twice as much as that of Tesla, meaning GM can clear its inventory as twice the speed of Tesla.
Tesla Days Sales In Inventory Ratio
The days sales in 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 clear 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 Q3 2019, Tesla managed to clear its inventory in only 60 days as opposed to 140 days back in 2015.
All in all, Tesla is improving its inventory management efficiency.
Tesla inventory has grown significantly over the past 5 years from 2015 to 2019. The respective current asset was only $1 billion back in 2015 but has grown to as much as $4 billion as of Q3 2019. The growth in inventory essentially means that the demand for Tesla products has been strong.
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 45% and 50% level) over the past 5 years.
With respect to current asset, Tesla keeps a very large inventory at more than 50% of current asset. A very large inventory can tie up working capital and makes the company vulnerable to declining demand. When sales drop, Tesla will be severely affected as the conversion of inventory to cash takes time.
Tesla inventory to revenue ratio has also been trending downward, indicating that the company has been improving its asset conversion cycle. Comparing the latest figure in Q3 2019 with the figures back in 2015, Tesla is using less inventory to generate more sales in the latest quarter. However, Tesla figure is still relatively high compared to that of GM. GM ratio is only half of that of Tesla.
Furthermore, both inventory turnover ratio and days sales in inventory have improved remarkably in the latest quarter compared to the results 5 years ago. As shown in prior charts, both ratios show that Tesla has managed to turn its inventory faster and thereby, reducing the number of days that the inventory stays at the warehouse.
Overall, Tesla inventory management has been steadily improving as seen from the improving ratios 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 be done.
1. All information including financial figures in this article was obtained from Tesla SEC Filings.