≡ Menu

Tracking Tesla Accounts Receivable and Days Sales Outstanding

Tesla supercharger rally. Source: Flickr Image.

The accounts receivable is an important current asset in a company’s balance sheet. It’s not only a variable that tells about the credit policy of a company but also an indicator of growth of the company. It’s no exception for Tesla. In Tesla’s balance sheet, the accounts receivable is the 3rd largest asset after cash and inventory.

According to Tesla’s financials, its 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’s quarterly accounts receivable extracted from the company balance sheets:

Tesla accounts receivable

Tesla accounts receivable in the balance sheets

Tesla’s Accounts Receivable

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’s customers and the financial institutions. It may take only a 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 the past 5 years from 2015 to 2020 to see how this current asset has changed over the years. In line with the company expanding operation, we should see the same trend happening in accounts receivable which should grow steadily along with revenue growth.

In addition, we will also look at several ratios related to accounts receivable such as the accounts receivable to sales, accounts receivable to current assets, accounts receivable turnover and Tesla days sales outstanding ratio. These ratios generally measure the health of Tesla’s account receivable as well as the efficiency of the company in payments collection.

By digging into these ratios, we can find out about the company credit policy in addition to how efficient the company collects cash from credit sales.

Chart of Tesla’s Quarterly Accounts Receivable

Tesla quarterly accounts receivable

Tesla quarterly accounts receivable

The chart above shows Tesla’s quarterly accounts receivable for the past 5 years from 2015 to 2020.

As shown from the chart above, the long term trend indicates that Tesla’s accounts receivable has grown significantly from 2015 to 2020. Back in 2015, Tesla’s accounts receivable was only $200 million in 1Q 2015 but the amount has grown to nearly $1.3 billion as of 1Q 2020, representing a year over year increase of 22%.

For perspective, the growth rate over the past 5 years was more than 600%. The impressive growth in accounts receivable has been mainly driven by business expansion. As the company’s revenue grew over the years, so did the accounts receivable.

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’s credit policy despite the record amount of accounts receivable in the balance sheets.

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 at the same rate as the revenue growth.

Let’s move on to the next chart.

Chart of Tesla’s Accounts Receivable to Sales Ratio

Tesla accounts receivable to sales ratio

Tesla accounts receivable to sales ratio

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

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

In general, a low account receivable to sales ratio is almost always favourable 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% between 2015 and 2020.

The average figure of 18% is quite reasonable as only about 18% of sales were 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 1Q 2020, the ratio has slightly ticked up to 21% from around 18% in the prior quarter. While Tesla’s accounts receivable has slightly declined sequentially from $1.32 billion to the current level of $1.27 billion, the receivable to sales ratio has gone higher, illustrating that the rate of decline of revenue was much worse than that of the accounts receivable.

Nevertheless, Tesla’s accounts receivable to revenue ratio remained relatively consistent with the historical number. The higher percentage at 20% throughout 2019 may not be much of a concern as long as this figure does not persistently tick higher in the coming quarters. We will keep an eye on this ratio from quarter to quarter.

As discussed, Tesla makes most of its sales with cash, we should expect that the company accounts receivable to revenue ratio to be reasonably low. The chart above shows that the ratio has been consistently low at an average ratio of 18% for the past 5 years.

Besides, the long-term trend of the chart does not indicate any drastic 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’s account receivable has been reasonably low with respect to sales and does not pose any threat to the company’s liquidity.

Chart of Tesla Accounts Receivable To Current Asset Ratio

Tesla accounts receivable to current assets ratio

Tesla accounts receivable to current assets ratio

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 a liquidity crunch.

As seen from the chart, the ratio has been steadily trending upward over the 5 years. The ratio was the lowest at only 4% in 1Q 2015. However, the figure reached a record high in 3Q18 at close to 14% before declining to around 9% in 1Q 2020.

Although the account receivable to the current assets ratio has trended higher on a long-term basis, it was still reasonably low below 10% of current assets as of 1Q 2020. And, we can see that in the last several quarters between 2018 and 2020, the ratio has continuously declined from quarter to quarter and reached only 8.6% in 1Q 2020 which was the lowest since 2018.

Again, we can safely conclude that Tesla accounts receivable has been reasonably low with respect to the current asset and does not affect the company’s short-term liquidity.

Chart of Tesla Days Sales Outstanding

Tesla days sales outstanding

Tesla days sales outstanding

Another ratio that most investors and analysts 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 in the chart above 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 been between 15 and 20 days range. In average, the days sales outstanding is 16 days for the past 21 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 1Q 2020, Tesla’s days sales outstanding of 19 days was slightly above the average figure but still did not deviate significantly from the historical results.

Besides, the trend of the chart looks flat and with only an insignificant upward direction during 2019. While Tesla’s accounts receivable has been trending higher for the past 5 years, the days sales outstanding has remained more or less the same, indicating that the company credit policy has not changed much.

Nonetheless, we will keep track of the ratio from quarter to quarter so that we can get to it before it gets out of hand.

Chart of Tesla Accounts Receivable Turnover

Tesla accounts receivable turnover ratio

Tesla 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 translates to 0.6 months (3 months / 5 times) or 18 days (0.6 months X 30 days).

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 around 6 for the past 21 quarters. What the figure means is that Tesla managed to turn the receivable over at about 6 times in a quarter.

In other words, Tesla manages to collect payments 6 times on average within a quarter or 3 months.

As of Q1 2020, Tesla account receivable turnover ratio of 5 was slightly below the average, showing that the company credit policy has not changed much even though the value of accounts receivable has surged to a record high in the same quarter.

Conclusion

Tesla accounts receivable has experienced explosive growth from only $200 million 5 years ago to $1.3 billion as of 1Q 2020. The phenomenal growth was expected as the company expanded its operations and was in line with the growth of revenue.

The ratio of Tesla accounts receivable to revenue shows that the company has an average ratio of 18% for the past 21 quarters. However, the ratio ticked up higher as of 1Q 2020 to 21% which was slightly above the average. Investors need to keep an eye on this figure in the coming quarters to see if it keeps ticking higher.

Nevertheless, the average figure of 18% is comfortably low and does not tie up a 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 for the past 5 years. However, a downtrend was observed between 2018 and 2020, and the ratio hit the lowest at 8.6% in 1Q 2020. The ratio was low and should not pose any threat to the company short-term liquidity.

Tesla days sales outstanding has been sort of flat from 2015 to 2020. The ratio has fluctuated between 15 days and 20 days range. The 1Q 2020 quarterly result shows that the ratio has trended slightly higher to 19 days but still did not deviate significantly from its historical result.

Similarly, Tesla accounts receivable turnover has been flat from 2015 to 2020 and have fluctuated between 4 and 8. The average figure for the past 21 quarters was around 6. This figure means that Tesla managed to collect its payment 6 times on average per quarter. In line with the days sales outstanding ratio, the accounts receivable turnover ratio has trended lower to 5 in 1Q 2020 and still sat at the comfortable level.

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.

Other posts that you might be interested:

Disclosure

Readers, investors or visitors are free to use, copy, quote, distribute, modify, edit, share and link any materials in this webpage such as the charts, snapshots, texts, paragraphs and so on. All you need to do is provide credits such as a link or mention the name of this website.

{ 1 comment… add one }
  • Dink Singer July 24, 2020, 7:19 am

    “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’s customers and the financial institutions. It may take only a couple of days for Tesla to get these payments when the customers opt for a loan to buy the company products.”

    Tesla does not have a financing subsidiary like most auto manufactures and sells its vehicles directly not through dealerships. If you look at the balance sheets of the major dealership groups, like the two largest, AutoNation Inc. and Penske Automotive Group you will also find high account receivables. AutoNation’s Q2 2020 10-Q shows receivables equal to 13.5 calendar (not sales) days of average revenue and 19.1% of current assets. Penske’s Q1 10-Q, 11.2 days and 11.4%.

    The reason for the high receivables is because it takes far more than a couple of days for dealers in the United States to receive the proceeds of loans from financial institutions that are financing auto purchases. This is so big a thing for auto dealers that they have a special type of accounts receivable just for it called “Documents in Transit”. Before a lender will make the payment it must be in possession of the vehicle title and lien (the lien is printed on the title). For a new vehicle the process starts with the dealer presenting a Manufacturer’s Certificate of Origin, a paper document (although often machine readable), to a state motor vehicle agency. Even in the best of times these agencies are not terribly quick. Dealers do get preferential treatment but still face long waits. During the COVID emergency the DMV situation got much worse. Here in Connecticut the current wait time for the DMV to issue a title for dealers using its online system is 21 days. There are many states that now use an electronic lien title system that transmits the lien and title to the lender overnight. In the other states the titles are mailed. Once the lender has the title and lien, only then is the payment made. In the old days that payment was made by check printed overnight and mailed the next business day but these days it may be electronic.

    I know something about this because I supported accounting systems for dealership associations in the 1970s and was the lead developer for a bank that was a major issuer of auto loans of the pilot Electronic Lien Transfer System with a state DMV in the 1990s.

Leave a Comment