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Tracking Tesla Accounts Receivable and Days Sales Outstanding

Tesla supercharger rally. Source: Flickr Image.

Tesla (NASDAQ:TSLA) accounts receivable is one of the major current assets in the company balance sheet. It is the third largest asset after cash and inventory. According to Tesla financials, accounts receivable primarily includes the following items:

  • 1. Amounts related to sales of powertrain systems.
  • 2. Sales of energy generation and storage products.
  • 3. Receivables from financial institutions and leasing companies offering various financing products to Tesla customers.
  • 4. Sales of regulatory credits to other automotive manufacturers.
  • 5. Maintenance services on vehicles owned by leasing companies.

Here is a snapshot of Tesla quarterly accounts receivable extracted from the company balance sheets:

Tesla accounts receivable

Tesla accounts receivable in the balance sheets

Tesla mentioned that the company does not carry significant accounts receivable related to vehicle sales as customer payments are normally due prior to vehicle delivery. As a result, most transactions related to vehicles sales are cash transaction.

Nevertheless, some receivables do come from vehicle sales but the amounts are not expected to be significant. My opinion is that the accounts receivable for vehicle sales should mostly come from payments owed by financial institutions for approved financing arrangements between Tesla customers and the financial institutions. It may take only couple of days for Tesla to get these payments when the customers opt for a loan to buy the company products.

In this article, we are going to look at the company accounts receivable over a 5-year period between 2015 and 2020 to see how this current asset has changed over the years. In line with the company expanding business, we should see the same trend happening in accounts receivable which should grow steadily along with revenue.

In addition, we will also look at ratios such as the accounts receivable to sales ratio, accounts receivable to current asset ratio, accounts receivable turnover ratio and Tesla days sales outstanding ratio. These ratios measure Tesla efficiency in payments collection. By digging into these ratios, we could find out the company credit policy in addition to how efficient the company collects cash from credit sales.

Chart of Tesla Quarterly Accounts Receivable

Tesla quarterly accounts receivable

Tesla quarterly accounts receivable

The chart above shows Tesla quarterly accounts receivable over a 5-year period from 2015 to 2019.

As shown from the chart above, the long term trend indicates that Tesla accounts receivable has grown significantly over the 5-year period from 2015 to 2019. Accounts receivable was only $200 million in 1Q 2015 but the amount has grown to a nearly $1.4 billion as of 4Q 2019. The number in 4Q 2019 is a record high for the company.

For perspective, the growth rate over the 5 year period is more than 600%. The impressive growth in accounts receivable has been in line with revenue growth and is mostly due to business expansion. As you will see in the following chart, the ratio of accounts receivable to revenue is roughly constant over the shown period, indicating that there is nothing wrong with the company credit policy.

Looking at the accounts receivable alone does not tell us much about the company’s financial well being. As such, we will also look at other ratios such as the accounts receivable to sales ratio which measures the amount of receivable with respect to revenue. This ratio is expressed in percentage and it tells us whether accounts receivable is growing in the same direction or the other way around with respect to sales.

The chart below shows Tesla accounts receivable to revenue ratio.

Chart of Tesla Accounts Receivable to Sales Ratio

Ratio of Tesla accounts receivable to revenue

Ratio of Tesla accounts receivable to revenue

The chart above represents Tesla accounts receivable to revenue ratio expressed in percentage. A higher percentage indicates that more sales are done on credit.

An increasing ratio over a period of time could potentially lead to short-term liquidity problem since most working capitals are tied up in accounts receivable, thereby slowing down cash conversion cycle for the company.

In general, a low accounts receivable to sales ratio is almost always favorable which means more cash is available for the company.

As seen from the chart above, the figure has remained relatively stable between the range of 15% and 25% over the 5-year period. In average, the quarterly ratio is roughly 18% for the 5-year period.

The figure is reasonable as only 18% of sales are done on credit. However, this figure needs to be compared with the industry standard or against a benchmark of other automakers to arrive at a conclusion.

As of 4Q 2019, the ratio is around 18% which is in line with the average number, indicating that even though the company accounts receivable is at record high, the respective percentage to revenue ratio remained relatively consistent with the historical number.

As discussed, Tesla does most of its sales with cash, we should expect that the company accounts receivable to revenue ratio to be reasonably low. The chart above proves that the ratio is reasonably low at 18% in the latest quarter of 4Q 2019.

Besides, the long-term trend of the chart does not indicate any upward direction which means both revenue and accounts receivable are growing in the same direction and at roughly the same rate. This trend is within my expectation and will likely remain so when the company expands its business.

In short, we can safely conclude that Tesla account receivable is not large enough with respect to sales to pose any threat to the company’s liquidity.

Chart of Tesla Accounts Receivable To Current Asset Ratio

Ratio of Tesla accounts receivable to current assets

Ratio of Tesla accounts receivable to current assets

Other than the ratio of accounts receivable to revenue, another ratio that is worth analyzing is the accounts receivable to current asset ratio which is shown above.

Generally, current asset equals working capital. This ratio measures how much working capital is locked up in the receivables. A high ratio indicates that too much working capital is tied up in accounts receivable and this means less cash is available to the company and may lead to liquidity problem.

As seen from the chart, the ratio has been trending upward steadily over the 5-year period. The ratio was the lowest at only 4% in 1Q 2015 but the figure reached record high in 3Q18 at close to 14% before declining to slightly more than 10% in 4Q 2019.

Even though the ratio of account receivable to current asset has trended higher, it is still reasonably low at only 10% of current assets as of 4Q 2019.

Again, we can safely conclude that Tesla accounts receivable is not large enough with respect to current asset that can affect the company short-term liquidity.

Chart of Tesla Days Sales Outstanding

Tesla days sales outstanding ratio

Tesla quarterly days sales outstanding ratio

Another ratio that investors pay close attention to when analyzing accounts receivable is the days sales outstanding. The days sales outstanding ratio measures the number of days the company collects its payments from credit sales.

The formula used to arrive at the days sales outstanding number is shown below:

Quarterly DSO = (Quarterly Accounts Receivable / Quarterly Sales) X Number of Days per Quarter

The ratio in the chart above is expressed in days. From the chart, the ratio looks stable over the shown period and have mostly fallen on between 15 and 20 days range. In average, the days sales outstanding is 16 days for the past 20 quarters. What this figure means is that Tesla takes, in average 16 days, to collect payments from vendors after credit sales.

My opinion is that the days sales outstanding of 16 days (about two weeks) is quite reasonable for Tesla since the company doesn’t do a lot of credit sales.

As of 4Q 2019, Tesla days sales outstanding of 16 days is in line with the average. Besides, the trend of the chart looks flat and without any sight of upward direction. While Tesla accounts receivable has been trending higher, the days sales outstanding remains more or less the same, indicating that the company credit policy has not changed much.

Chart of Tesla Accounts Receivable Turnover

Tesla accounts receivable turnover ratio

Tesla quarterly accounts receivable turnover ratio

Finally, another ratio that is as important as all the others is the accounts receivable turnover ratio. This ratio is basically the same as the days sales outstanding except that this ratio measures the receivable turn in number of times in a period. The measured period here can be in quarter or years.

The higher the numbers, the better the company is in collecting payments. For example, if the receivable turnover ratio is 5 in a quarter, it means that the receivable has turned over 5 times in a quarter. In terms of days, the receivable turnover ratio of 5 indicates that the company takes 0.6 months (3 months / 5 times) or 18 days (0.6 months X 30 days) to collect its payment.

The formula used to arrive at the accounts receivable turnover ratio is as follow:

Quarterly AR Turnover Ratio = Quarterly Sales / Quarterly Accounts Receivable

From the chart above, the ratio looks pretty much flat over the shown period and have slightly fluctuated between the 4 and 8 range. In average, the accounts receivable turnover ratio is 6 for the past 20 quarters. As such, Tesla receivable turnover is about 6 times in a quarter.

What the figure means is that in a quarter or 3-month period, Tesla manages to collect payments 6 times in average within a quarter.

As of Q4 2019, Tesla account receivable turnover ratio of 6 is in line with the average, showing that the company credit policy has not changed much even though accounts receivable surged to record high in the same quarter.

Conclusion

Tesla accounts receivable was only $200 million 5 years ago and the figure has grown close to $1.4 billion as of 4Q 2019. The amazing growth rate of accounts receivable over the previous 5 years is expected as the company expands its operations and is in line with the growth of revenue.

The ratio of Tesla accounts receivable to revenue shows that the company is having an average ratio of 18% over the 5-year period. What this figure means is that an average 18% of sales is done on credit on a quarterly basis. This average figure of 18% is moderately low and is not large enough to tie up significant amount of cash from sales in accounts receivable.

The ratio of Tesla accounts receivable to current asset shows that the number has been trending higher over the 5-year period and has reached slightly more than 10% as of 4Q 2019. However, the figure is still acceptably low and should not pose any threat to the company short-term liquidity.

Tesla days sales outstanding has been sort of flat over the 5 year period from 2015 to 2019 and have fluctuated between 15 days and 20 days range. The average days sales outstanding is around 16 days for the past 20 quarters, indicating that the company credit collection period is relatively short.

Similarly, Tesla accounts receivable turnover has been flat over the 5 year period from 2015 to 2019 and have fluctuated between 4 and 8. The average figure is 6 for the past 20 quarters. This figure means that Tesla managed to collects its payment 6 times in average per quarter. This figure is expected as Tesla stated that cash is received as soon as the vehicles are delivered to customers.

References and Credits

1. All financial figures above were obtained from Investor Relation pages for the following companies: Tesla.

2. Featured images in this article are used under creative commons license and are sourced from: Todd Van Hoosear.

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