Tesla (NASDAG:TSLA) and General Motors (NYSE:GM) are automakers with very large asset bases. In fact, when you look at their respective financial statements, you will find that their long-term assets make up the bulk of total assets. On top of that, an equally large current asset base is also present in the balance sheet which is mainly used for working capital.
As you will see in the following charts, both auto manufacturers have very low asset turnover ratio, indicating that their business models either are inefficient in assets utilization or that requires very heavy asset bases to run their capital intensive business operations.
Before we start to look at the asset turnover ratio of Tesla and GM, we will run through the asset part of their balance sheet to get an idea of what makes up their current and long-term assets.
The following snapshots show each company respective assets.
Here is a snapshot of Tesla assets in the balance sheets extracted from the Q3 2019 quarterly filing:
From the snapshot above, Tesla long-term assets makes up roughly 2/3 of total assets, with property, plant and equipment taking up more than half of the long-term assets at $10 billion. Other than factories and plants, Tesla other fixed assets include solar energy systems and operating leased vehicles which are leased properties that generates substantial leasing income for the company.
Besides, the company cash balances and inventories in the current asset part make up more than half of the short-term assets. The reason for the huge numbers of cash and inventories is to support the company growing businesses and subsequently the required working capital.
As of Q3 2019, Tesla total asset is roughly $33 billion in which $22 billion of that is long-term assets.
General Motors Assets
When it comes to General Motors asset bases, the following snapshot which was extracted from the Q3 2019 quarterly filing gives you a glimpse of what constitutes GM current and long-term assets.
As seen from the above snapshot, GM cash balances (inclusive of marketable securities) and inventories make up as much as half of the total current assets. Since GM also provides financial services such as loans to customers and retailers, part of the current assets consist of large amount of GM Financial receivables that generates interest income for the company.
In terms of long-term assets, GM balance sheets are primarily loaded with properties such as factories, plants and equipment at $38 billion. Besides, the company leased properties such as equipment on operating leases makes up a large part of GM long-term assets at $42 billion. One unexpected item within the long-term assets is the deferred income taxes that is valued at almost $24 billion.
As of Q3 2019, GM total asset is roughly $231 billion in which $151 billion of that is long-term assets.
Asset Turnover Ratio
After looking into the assets of both automakers, we know that both companies require large amount of assets to run and expand their businesses. For example, GM total assets amounted to a massive sum of $231 billion whereas Tesla total assets is about 7 times less than that of GM at only $33 billion.
Having a massive base of assets does not necessary mean that one company is better than the other if the company can’t efficiently utilize its assets. In fact, if a company fails to fully utilize its assets to generate the expected revenue, it simply means an inefficient management team.
With that said, we will look at the asset turnover ratio of both automakers over a period of time to find out how efficient both companies are in managing their assets. The asset turnover ratio is an indicator of the efficiency with which a company is using its assets to generate sales or revenue.
For example, a high asset turnover ratio simply means a company is efficiently using its asset to generate sales when compared with another company of the same type and in the same industry. In contrast, a low asset turnover ratio means the other way around where the management fails to manage the company assets properly.
Just a word of caution, the asset turnover ratio is only meaningful when it’s used to compare companies of the same type and within the same industry. Otherwise, it’s pointless when you compare a company in the auto manufacturing industry with that of software industry. A software company is likely to operate with much less assets than a car manufacturer.
Nevertheless, what we are doing here is comparing both Tesla and General Motors which operates in the same industry. When we observe the asset turnover ratio of both auto manufacturers over a period of time, in this case on a quarterly basis, we can find out whether their respective asset turnover ratio has improved or deteriorated over the analyzed period.
In this case, we are tracking the asset turnover ratio of both automakers to find out which one is better than the other in terms of assets usage.
Therefore, sit tight and read on!
Chart of Tesla vs GM in Total Asset Turnover Ratio
The chart above shows the total asset turnover ratio of both companies for the past 5 years from 2015 to 2019. The formula I used to create the above chart is as follow:
Total asset turnover ratio = Quarterly sales / Quarterly closing total assets
As seen from the chart above, both Tesla and GM total asset turnover ratio are extremely low, indicating that their business models requires a huge amount of assets to turn a profit. For example, over the 5-year period, GM asset turnover ratio has been hovering between the 0.15 and 0.20 ratio, meaning that for every $1 dollar of asset, the company only generated $0.15 to $0.20 of sales.
When comparing both companies, GM total asset turnover ratio was much better than that of Tesla from 2015 to 2017. However, Tesla total asset turnover ratio had slowly improved since 2016 and surpassed that of GM starting Q3 2018.
Over the 5-year period, we can see that GM asset turnover ratio has been on a downward trend from 2015 to 2019, dropping from the highest point of 0.20 to only 0.15 as of Q3 2019. In contrast, Tesla asset turnover ratio had only worsened from 2015 to 2016 but started to pick up since 2017. In Q4 2016, Tesla total asset turnover ratio was at the lowest value of 0.10 but had since improved tremendously and reached the highest value at 0.25 in Q4 2018 before declining slightly to 0.20 as of Q3 2019.
Coincidentally, Tesla total asset turnover ratio hit the lowest in Q4 2016 when the company added huge amount of assets to its balance sheet from the acquisition of SolarCity during that quarter. Fortunately, Tesla managed to improve the ratio since then and achieved a ratio of 0.25 in Q4 2018 after the company launched Model 3 in 2017.
The success of Model 3 has propelled the company to achieve record sales revenue in 2018 and 2019. Subsequently, Tesla total asset turnover ratio has steadily improved, indicating that management team could successfully turned the company fortune around with the successful launch of Model 3. With the improving asset turnover ratio, Tesla managed to overtake GM in 2019 in assets management efficiency.
On the contrary, GM asset management efficiency has been on a downward trend, meaning that the company has been adding assets but without increasing sales. Moreover, GM asset turnover ratio has reached a record low of only 0.15 as of Q3 2019. With the ratio at 0.15, GM only managed to generate $0.15 of sales out of every $1.00 of assets.
In short, Tesla total assets usage has improved over the years and overtook GM since 2018.
Chart of Tesla vs GM in Long-Term Asset Turnover Ratio
The chart above shows the long-term asset turnover ratio of both companies for the past 5 years from 2015 to 2019. The formula I used to create the above chart is as follow:
Long-term asset turnover ratio = Quarterly sales / Quarterly closing long-term assets
Why long-term asset you may ask? As discussed at the start of the article, long-term assets of both auto manufacturers consist of mainly fixed or tangible assets such as properties, equipment and leased vehicles. By focusing only on long-term assets, we have excluded all current assets which are used primarily as the working capital of the companies to pay off expenses such as payroll, rental expenses, insurance and advertising costs.
On the other hand, long-term assets are used primarily for generating sales. With long-term assets, we are focusing on the bread and butter of the companies. Long-term assets are assets that both companies consistently use to derive revenues. As such, the long-term asset turnover ratio is a more refined ratio that focuses on the most important assets of the companies.
With that said, when we look at the chart of the long-term asset turnover ratio above, we can see clearly the trend of both plots compared to prior chart. For example, the downtrend of GM long-term asset turnover ratio is very obvious in this plot. The decline of the ratio was quite significant from 2015 to 2016. After that, the plot was sort of flatten out in 2019 and stayed at the value of 0.24 throughout the year.
The decline of GM long-term asset turnover ratio may indicate that either the company has been accumulating long-term assets over the years which has caused the plot to decline or the demand for its products has reached a plateau which has caused revenue or sales to flat out over the period.
It looks like GM has been having both factors. From 2015 to 2019, GM has been accumulating large amount of assets as seen from this article: GM total debt and liabilities. GM long-term assets has increased from roughly $100 billion in 2015 to as much as $140 billion in 2019.
Moreover, GM sales has been flat from 2015 to 2019 as seen from this article: 5 years analysis of GM revenue breakdown. The effect of both conditions mentioned above has caused GM long-term asset turnover ratio to worsen much faster.
On the contrary, Tesla long-term asset turnover ratio has only trended downward from 2015 to 2016. In the same period, Tesla has been accumulating assets while its sales were flat, causing assets usage to deteriorate. Fortunately, Tesla sales took off in 2017 when it launched Model 3. During the same period, Tesla continued to acquire assets as seen from this post: Tesla total debt breakdown. Although Tesla long-term assets has grown significantly from 2017 to 2019, its sales has actually grown much faster in the same period, causing assets usage to improve as seen from its increasing ratio in the chart above.
In short, Tesla long-term assets utilization has been improving whereas GM long-term assets utilization has been slowly deteriorating.
Both Tesla and GM are automakers with significant assets in their balance sheets. Specifically, their respective long-term assets make up the bulk of total assets. Both companies require significant amount of long-term assets to generate sales.
The asset turnover ratio measures the efficiency of a company in assets utilization. The higher the ratio, the better the company is in utilizing assets to generate sales.
As seen from the charts, both GM and Tesla are having very low asset turnover ratio, meaning that the amount of revenue generated is proportionally low compared to the amount of assets. The reason for the low asset utilization has to do with their respective business models which require huge asset bases to run the car manufacturing businesses. Think about all the factories, warehouses, offices, sales galleries, equipment and tools that both companies need to design, manufacture and subsequently deliver the vehicles.
The long-term asset turnover ratio focuses mainly on the fixed or tangible assets of the companies. These are the assets for deriving sales. Similarly, both automakers are having very low long-term asset turnover ratio. Again, the low long-term asset utilization has to do with their assets-heavy business models.
While Tesla asset turnover ratio is low by itself, the company has managed to improve the ratio and overtook that of GM since 2018 at the launch of Model 3 which had remarkably propelled the company to record sales revenue.
All in all, Tesla is simply much better than GM in asset management.
References and Credits
2. Featured image credit: Got Credit.