Tesla (NASDAG:TSLA) and General Motors (NYSE:GM) are automakers with very large asset bases. In fact, when you look at their financial statements, you will find that their total assets consist of mostly long-term assets.
For example, Tesla’s ratio of long-term assets to total assets was about 55% as of 2Q 2021 and the ratio was even higher for GM at 66%. In other words, these companies rely on a large number of long-term assets to generate sales.
On top of that, an equally large number of current assets are also present in the balance sheet of these automakers. Current assets such as cash and cash equivalents are huge in the balance sheets and they are used mainly as working capitals during the normal course of the business operations.
Additionally, both Tesla and GM have a reasonably low asset turnover ratio, notably at less than 100%. The reason for the low asset turnover ratio is due to the large asset base of these automakers.
A low asset turnover ratio usually indicates that a company is operationally asset-heavy. In this aspect, both Tesla and General Motors rely heavily on current and long-term assets to produce sales. In general, an asset-heavy company needs to invest continuously in assets, including properties, plants and equipment, to make sales.
In this article, we will compare the asset turnover ratio of both Tesla and General Motors and find out how they stack up to each other in terms of assets. Since both Tesla and GM operate on a different business model, a retail-based for Tesla and a wholesale-based for GM, we will see if the different business models will affect the asset turnover ratio between the two companies.
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.
Let’s take a look!
Tesla’s Total Assets
Here is a snapshot of Tesla’s total assets in the balance sheets extracted from the 2Q 2021 quarterly filing:
As of 2Q 2021, Tesla’s total asset came in at $55 billion in which $30 billion or 55% of that was long-term assets.
Tesla’s long-term assets consist of mostly properties, plants and equipment. These assets alone take up roughly half of the long-term assets at more than $15 billion. In addition, Tesla’s other long-term assets also include solar energy systems and operating leased vehicles which are basically leased properties that generate leasing income for the company.
In terms of current assets, Tesla’s cash position come in at $16 billion, the largest component in this segment. On the other hand, Tesla’s inventory makes up about $4.7 billion and is the second largest component in current assets.
Tesla’s huge cash piles and large inventory levels in the current assets, coupled with $15 billion of property, plant and equipment all point to an asset-heavy business model for the company.
General Motors’ Total Assets
For General Motors, the following snapshot which was extracted from the Q2 2021 quarterly filing gives you a glimpse of what constitutes GM’s current and long-term assets.
As of Q2 2021, GM’s total assets came in at $242 billion of which $159 billion or 66% of that was long-term or fixed assets. From a comparison perspective, GM’s total assets were more than 4X greater than that of Tesla.
For long-term assets, GM’s 2Q 2021 balance sheets show that the company’s asset base was primarily loaded with fixed assets such as properties, plants and equipment which was valued at nearly $40 billion. Aside from buildings and equipment, the company also has leased assets such as the equipment on operating leases which was valued at nearly $41 billion as of fiscal 2021 2Q. These are primarily leased vehicles that will generate long-term economic benefits for the company.
One unexpected item within the long-term assets category was the deferred income taxes which were valued at more than $22 billion.
In terms of current assets, GM’s cash balances (inclusive of marketable securities) and inventories totaled as much as $42 billion as of 2Q 2021 and this amount made up slightly more than half of the company’s current assets.
Since GM also provides financial services such as loans to customers and dealerships, we can see some portions of current assets consisted of receivables such as the GM Financial receivables which were worth $24 billion as of Q2 2021. The receivable is also one of GM’s current and long-term assets that continuously generate interest income for the company.
Definition Of Asset Turnover Ratio
After looking into the assets of both automakers, we know that both companies require a large number of assets to run and generate revenues out of their businesses’ operations. For example, GM’s total assets were worth a massive sum of $242 billion whereas Tesla’s total assets were valued at $55 billion as of 2Q 2021.
Having a larger assets base does not necessarily 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 business operation.
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 with respect to each other 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. As stated, the asset turnover ratio is simply the outcome of dividing the revenue with total assets or long-term assets in the case of measuring the fixed asset turnover ratio.
Here is the equation that illustrate the above statements:
Asset Turnover Ratio = Total Sales/Revenues (TTM) / Total Assets (or Long-term Assets)
A high asset turnover ratio means a company is using relatively fewer assets than the other to generate certain sales when compared with companies of the same type and in the same industry. In contrast, a low asset turnover ratio means that a company is most likely asset-heavy and requires a large asset base to generate revenue. Moreover, a low ratio also can imply that the company is simply inefficient when it comes to assets usage.
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 the software industry. A software company is likely to operate with much fewer assets than a car manufacturer.
Nevertheless, what we are doing in this article is comparing both Tesla and General Motors which operates in the same industry but with a different business model. As mentioned, Tesla runs a retail-based business model whereas GM runs a wholesale-based business model.
Theoretically, GM should have a higher asset turnover ratio compared to Tesla since GM does not have to own a bunch of retail stores like what Tesla is doing.
So, let’s take a look at the asset turnover ratio of both companies!
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 fiscal 2015 to 2021. The formula I used to create the above chart is as follow:
Total asset turnover ratio = TTM revenue / Quarterly closing total assets
As seen from the chart, both Tesla and GM’s total asset turnover ratios have been relatively low over the past 5 years, hovering less than 100%. The low ratio indicates an asset-based business model.
Between fiscal 2015 and 2021, GM’s asset turnover ratio has been on a decline, reaching as low as 50% in fiscal 1Q 2021 before moving higher to 58% in 2Q 2021. At this level of ratio, GM generates $0.50 dollar of sales for every $1 dollar of assets.
On the other hand, Tesla’s asset turnover ratio has been on a rise, reaching as much as 76% as of 2Q 2021. Therefore, Tesla’s assets usage efficiency was slightly better than that of GM. At this ratio, Tesla generates about $0.76 dollar of sales for every $1 dollar of assets.
What’s worth pointing out is that Tesla’s asset turnover ratio has surpassed that of GM since fiscal 2018. In contrast, GM’s asset turnover ratio has been declining and was at a record low as of the latest quarter in fiscal 2021.
Tesla’s success was largely attributed to the launch of the Model 3 back in 2018. Since the launch, the Model 3 has been a highly successful product and this has led to exponential sales which in turn has propelled Tesla’s asset turnover ratio to new highs in subsequent years.
On the other hand, GM’s diminishing asset turnover ratio is largely attributed to its declining sales over the years. GM’s automotive product has not been as successful as that of Tesla and has even experienced a decline, especially during the pandemic era. GM’s sedan sales have been particularly in dire situations.
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 fiscal 2015 to 2021. The formula which I used to create the above chart is shown below:
Long-term asset turnover ratio = TTM revenue / Quarterly closing long-term assets
Why long-term asset you may ask? Long-term assets for both companies represent mainly the fixed or physical assets such as properties, equipment and leased vehicles and they are relatively stable in the long term. On the other hand, current assets or short-term assets such as cash, inventory and receivables can vary by a large degree from quarter to quarter.
Therefore, by focusing only on long-term assets, we will exclude all current assets that will change significantly from one quarter to another. We want to see what these long-term assets can return in terms of sales. Besides, these fixed assets require a substantial amount of upfront investment from the company and we would expect to see a return on investment from these assets.
As such, the long-term asset turnover ratio is a more refined ratio that focuses only 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, the trend of both plots is nearly the same as that of the prior chart. For example, GM’s long-term asset turnover ratio has been on a decline since fiscal 2016 while Tesla’s long-term asset turnover ratio has been on a rise.
As of fiscal 2021 Q2, GM’s long-term asset turnover ratio reached only 88% compared to 138% for Tesla. Similarly, Tesla’s long-term asset turnover ratio has exceeded that of GM since fiscal 2018 and the gap is getting larger, indicating that Tesla’s long-term asset use has been getting more efficient than that of GM.
Again, Tesla’s growing long-term asset turnover ratio has been primarily driven by the success of the Model 3. Since its launch in 2018, Tesla’s long-term asset turnover ratio has been on a rise and has far exceeded that of GM as of 2Q 2021.
In short, Tesla’s long-term assets utilization has been in much better shape than GM’s ratio despite operating a lot more retail stores compared to GM’s wholesale-based business model in which it does not operate any retail stores.
Both Tesla and GM are automakers with huge numbers of assets in their balance sheets. In particular, their total assets are mostly long-term assets, notably at a ratio of 55% and 66% for Tesla and GM, respectively, in fiscal 2021 Q2. Both companies require a huge number of not only current assets but also long-term assets to produce sales.
The asset turnover ratio measures the efficiency of a company in assets utilization with respect to sales revenue. The higher the ratio, the better the company is at utilizing assets to generate sales since fewer assets are required to arrive at a certain amount of revenue. A lower ratio implies an asset-heavy company where a large asset base is required to generate sales.
Both GM and Tesla are having very low asset turnover ratios, meaning that the amount of revenue generated is proportionally low compared to the number of assets. The reason for the low asset utilization has to do with their business models which require huge asset bases to operate. In this case, their business models are primarily the design, manufacturing and distribution of automotive products.
As of fiscal 2021 2Q, Tesla’s asset turnover ratio came in at 76% compared to 58% for General Motors.
The long-term asset turnover ratio focuses mainly on the fixed or tangible assets of the companies. Similarly, both automakers are having a very low long-term asset turnover ratio. Again, the low long-term asset utilization has to do with their assets-heavy business models.
As of fiscal 2021 2Q, Tesla’s long-term asset turnover ratio came in at 138% compared to 88% for General Motors.
All in all, Tesla is simply much better than GM in asset utilization despite having to operate up a number of retail stores as opposed to GM’s wholesale model which does not require operating any retail stores.
References and Credits
2. Featured images in this article are used under creative commons license and sourced from the following websites: Got Credit.
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