Tesla’s inventory is one of the largest short-term assets in the balance sheet, making up as much as 15% of the company’s total current assets as disclosed in the 4Q 2020 financial results.
The inventory will generate substantial future economic benefits 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. 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 reveals a vast difference in some of the ratio, including the 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 ratios such as the inventory turnover ratio and days sales, let’s take a quick look at what makes up Tesla’s inventory.
What Makes Up Tesla’s Inventories
Here is a snapshot of the inventory components disclosed in the Q4 2020 financial statement:
Tesla’s inventory basically consists of the following components:
- 1. Raw materials
- 2. Work in progress
- 3. Finished goods
- 4. Service parts
Finished goods is the largest component among all the inventories. 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. The service part is actually part of the finished goods and Tesla has a separate section for this part of the 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.
I would pay particular attention to the “Finished Goods” inventory since it’s the largest component, accounting for more than half of the 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 period from 2015 to 2020.
As the chart shows, Tesla’s inventory has been rising significantly between 2015 and 2020, hitting a record high at $4.5 billion in Q1 2020.
However, the inventory declined from its high of $4.5 billion to $4.1 billion in 2020 Q4.
While Tesla posted a record inventory level in 2020, the figure was still very far off from General Motors’ $10 billion inventory.
Over the last few years, Tesla has been expanding its footprint globally by building mega factories around the world.
The expansion has resulted in the growth of its working capital, and this has led to the increase in the company’s inventory level.
When Tesla builds up its inventory at this pace, it means only one thing – there is a demand for its products.
In short, Tesla will not be building its inventory to such a massive level for no reason.
Chart of Tesla’s Inventory YoY Growth Rates
The chart above shows Tesla’s inventory year over year (YoY) growth rates for the period between 2016 and 2020.
According to the chart, Tesla’s inventory YoY growth has been positive in all quarters in the last 5 years, with most of the growth occurring in the early years from 2016 to 2018.
While Tesla’s inventory YoY growth may have slowed down in recent years, it is still reporting high double-digit growth rates from 2019 to 2020.
Nonetheless, Tesla recorded a YoY growth rate of 15.5% for its inventory in Q4 2020, which was still pretty remarkable compared to General Motors which recorded a YoY growth rate of only 5.9% in 4Q 2019.
Tesla’s Inventory Breakdown
* finished goods are combined with service parts to form a single category.
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.
Without a doubt, the largest of the inventory has always been the finished goods between 2015 and 2020, making up more than 50% of total inventory in 2020 Q4.
The raw materials inventory which made up about 36% of the total inventory was the second-largest component in 4Q 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 the latest quarter.
Between 2015 to 2020, all 3 inventory components have been rising, with most of them reaching a record high as of 4Q 2020.
The uptrend was specifically significant for raw materials in the last 5 years and it went parabolic in 2019.
In general, the finished goods component is the most crucial part of the inventory as this asset directly relates to sales revenue.
As such, it makes sense for Tesla to have slightly more than 50% of total inventory coming from this segment.
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 4Q 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 illustrate an overstocked of raw materials with respect to finished goods, resulting in lost revenue.
In short, Tesla’s finished goods inventory level has been quite consistent with respect to total inventory over the past 5 years.
In 2020, Tesla’s finished goods inventory came down steadily when it hit 65% in 2019.
The finished goods component slowly reached 45% in 2Q20 and ticked higher to 50% in 4Q20.
The ratio shows that Tesla has been quite efficient in managing its finished goods inventory throughout the period.
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 equally divided from 2015 to 2020.
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 over several quarters.
Ratio of Tesla’s Inventory to Current Asset
The chart above is created to show the amount of inventory tied up in current assets 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 assets 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 the Model 3 in 2018.
Nevertheless, the ratio declined slowly during 2019 and inventory reached the lowest ratio at less than 20% of current assets by Q4 2020.
Comparing this figure with that of GM which was in the 15% range, Tesla’s ratio was slightly higher than that of GM in the latest quarter.
Therefore, Tesla seems to be keeping the right amount of inventory with respect to current assets comparing to that of General Motors.
The gap used to be wider between Tesla and GM and this may have something to do with the difference in the business model. As stated before, Tesla’s model is retail-based whereas GM’s model is wholesale-based.
A 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.
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
* Trailing 12-month or TTM revenue is used in the chart above.
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 the 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 a certain amount of sales.
As seen from the plot, the ratio was higher in the early years.
In other words, Tesla was less efficient in managing the inventory to generate the sales revenue.
However, the ratio has declined steadily over the 5 years and dropped to its lowest level at around 14% in Q4 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 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’s 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 less than 10% which means GM used far less inventory to generate its revenue.
So Tesla’s ratio is almost twice as much as that of General Motors.
Again, the difference may have been attributed to the difference in the 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
* Trailing 12-month or TTM cost of revenue is used for the calculation of the ratio.
We have seen that Tesla has been improving its sales 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’s 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 slightly higher than 2.0. This figure means that Tesla managed to turn its inventory over at about 2 times in a year.
For example, it takes Tesla about 6 months 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 6.0 in 4Q 2020. At a ratio of 6.0, Tesla managed to clear the inventory about 6 times in a year.
Comparing this figure with that of GM, Tesla has a lot of catching 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 is far more efficient in clearing off its inventory and is at twice the speed of the retail-based 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 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 days sales in inventory in 2015 was the worst because the company took more than 160 days to replace its inventory in a year.
In this aspect, Tesla essentially took nearly 2 quarters to clear its entire inventory before being replaced by new stocks.
Similar to the inventory turnover ratio plot, the days sales in inventory has also been improving especially in recent years.
You can see from the chart that Tesla managed to clear its inventory in only about 60 days in 2020 Q4 as opposed to 160 days back in 2015.
Tesla’s Finished Products Days of Inventory
* Trailing 12-month or TTM cost of revenue is used for the calculation of the ratio.
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 refer 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 365
I have replaced the new car inventory with Tesla’s finished products inventory which can easily be obtained from financial statements and it includes not only new vehicles but also used vehicles, energy producst as well as service parts.
As the chart shows, Tesla’s finished products days of inventory hovered between 30 and 65 days over the past 5 years and the average value was around 47 days.
Comparing this figure with that of total inventory, the finished products days of inventory has been in much better shape and were roughly less than twice the figure of the total inventory as of 4Q 2020.
In other words, finished product inventory is replaced at twice the speed of total inventory.
Similarly, Tesla’s finished product days of inventory has also been declining in the last 5 years and reached the lowest level at 30 days as of the latest quarter.
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 $4.1 billion in 4Q20. 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 assets, Tesla keeps a reasonable amount of inventory at about 15% of current assets. 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 4Q 2020 quarter, which means Tesla needed twice the inventory to generate the same sales.
Overall, Tesla’s inventory management has steadily improved as seen from some of 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 work 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.
2. Some numbers are the author’s own calculation.
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