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 total assets consist of mostly long-term assets. For example, Tesla’s ratio of long-term assets to total asset was about 60% as of 1Q 2020 and the same goes for GM. In other words, these companies require large amount of long-term assets to operate and to generate sales.
On top of that, an equally large amount of current assets are also present in the balance sheet of these companies. These current assets such as cash and cash equivalents are mainly used as working capitals during the normal course of the business operations.
As you will see in the following charts, both Tesla and GM have reasonably low asset turnover ratio. The asset turnover ratio measures the assets required to generate certain sales and is calculated by dividing the revenue with total assets or long-term assets of a company.
A low asset turnover ratio usually indicates that a company is operationally asset heavy. In this aspect, the company relies heavily on both current and long-term assets to generate sales. In general, an asset heavy company needs to invest continuously in assets in order to run the business.
In this article, we will compare the asset turnover ratio of both Tesla and General Motors and find out how the ratio differs. Since both Tesla and GM operates differently in the sense that Tesla operates on a retail based basis whereas GM is on a wholesale based basis, we will see if these 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.
The following snapshots show each company respective assets.
Tesla’s Total Assets
Here is a snapshot of Tesla’s total assets in the balance sheets extracted from the 1Q 2020 quarterly filing:
As of 1Q 2020, Tesla’s total asset was $37.3 billion in which $22 billion of that was long-term assets.
Tesla’s long-term assets of $22 billion made up roughly 60% of total assets, with property, plant and equipment taking up over half of the long-term assets at more than $10 billion. Other than factories and equipment, Tesla’s other long-term assets also include solar energy systems and operating leased vehicles which are basically leased properties that generates leasing income for the company.
In terms of current assets, Tesla’s both cash balances of $8 billion and inventories of $4.5 billion alone contributed more than 80% of assets to current assets. The reason for the huge amount of cash and inventory can be explained by the fact that Tesla is an asset-heavy company that requires a large amount of working capital to support its business.
General Motors’ Total Assets
When it comes to General Motors’ total asset, the following snapshot which was extracted from the Q1 2020 quarterly filing gives you a glimpse of what constitutes GM’s current and long-term assets.
As of Q1 2020, GM’s total asset was $246.6 billion in which $149 billion of that was long-term or fixed assets. Comparing this figure with Tesla, GM’s total asset was 6X greater than that of Tesla.
For long-term assets, GM’s 1Q 2020 balance sheet was primarily loaded with fixed assets such as plants and equipment which was worth about $38 billion. Besides, the company also has leased properties such as equipment on operating leases which was worth $41 billion. These are hard or fixed assets 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 was valued at almost $24 billion.
In terms of current assets, GM’s cash balances (inclusive of marketable securities) and inventories totaled as much as $56.9 billion as of 1Q 2020 and this amount made up 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 was worth $26 billion. The receivable is also one of GM’s current and long-term assets that generate interest income for the company.
Asset Turnover Ratio
After looking into the assets of both automakers, we know that both companies require large amount of assets to run and generate revenues out of their businesses’ operations. For example, GM total assets was worth a massive sum of $247 billion whereas Tesla’s total assets was valued at $37 billion as of 1Q 2020.
Having a larger assets base 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 executive 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 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 / Total Assets (or only Long-term Assets)
A high asset turnover ratio means a company is using relatively less 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 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 software industry. A software company is likely to operate with much less 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 different business model. As mentioned, Tesla is retail based whereas GM is wholesale based. Theoretically, GM should have a higher asset turnover ratio compared to Tesla since GM does not have to own a bunch of retailing stores like what Tesla has been doing.
So, just sit tight and read on to find out who is better in assets management!
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 2020. 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, both Tesla and GM’s quarterly total asset turnover ratio have been relatively low over the past 5 years, hovering between 0.10 and 0.25. The low ratio indicates that their business models requires a large asset base to generate sales.
For example, between 2015 and 2020, GM’s asset turnover ratio has reached the highest ratio at 0.20 in 2015 but has since dropped off steadily to only 0.13 as of 1Q 2020. At a ratio of 0.13, GM generates about $0.13 of sales for every $1 dollar of asset on a quarterly basis.
On the other hand, Tesla recorded an asset turnover ratio of 0.16 as of 1Q 2020, which means Tesla was slightly better than GM in asset utilization during the same quarter. In this case, Tesla generates about $0.16 of sales for every $1 dollar of asset on a quarterly basis.
However, we can see that Tesla’s asset turnover ratio has slowly improved over the past 5 years from 2015 to 2020, increasing from 0.15 in 2015 to 0.16 in 2020. In between the period, Tesla’s asset turnover ratio managed to reach 0.25 in some of the quarters in 2018 which was record high for the company.
Over the same period, we can see that GM asset turnover ratio has been on a downtrend from 2015 to 2019, dropping from the highest ratio of 0.20 to only 0.13 as of 1Q 2020. In contrast, Tesla asset turnover ratio had only worsened from 2015 to 2016 but started to tick up since 2017 and reached nearly 0.25 in Q4 2018 before declining slightly to 0.16 Q1 2020.
Coincidentally, Tesla’s 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, the company managed to improve its asset usage since then and achieved a quarterly ratio of 0.25 in 2018 which was mainly due to the ramp of Model 3 in the same year.
The success of Model 3 has propelled Tesla 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 assets management efficiency starting 2018.
In short, Tesla total assets usage has improved over the years and overtook GM since 2018. In prior discussion, we argued that GM should have a higher ratio compared to Tesla since GM does not have to own a bunch of retail stores as opposed to Tesla which operates quite a number of stores and service locations.
Yet, GM’s asset turnover ratio has been relatively lower than that of Tesla between 2018 and 2020. The reason for GM’s lower asset utilization can be attributed to some of the assets that the company owns. For example, GM has quite a large amount of receivables as opposed to Tesla which has none of it. While these assets may represents a continuous streams of income for GM, these assets generates relatively low return for GM which may explain the lower asset turnover ratio for the company.
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 which I used to create the above chart is shown below:
Long-term asset turnover ratio = Quarterly sales / Quarterly closing long-term assets
Why long-term asset you may ask? Long-term assets for both companies represents 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 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 more obvious compared to prior chart. For example, the downtrend of GM’s long-term asset turnover ratio is steeper compared to prior chart. The same goes for Tesla’s long-term asset turnover ratio.
For instance, GM’s long-term asset turnover ratio has declined from 0.36 in Q1 2015 to only 0.20 in Q4 2019 before slightly trending higher to 0.23 in Q1 2020. In general, the drop of GM’s ratio was steeper between 2015 and 2017 and the curve started to flatten since 2018. We are seeing an improvement in Q1 2020 when the ratio ticked up slightly.
There are a few explanations for the decline of GM’s long-term asset turnover ratio. One of which is that GM has accumulated a substantial amount of long-term assets over the years and yet, the company has been unable to prop up sales during the same period.
From this article, GM total debt and liabilities, we can see that GM’s long-term assets has actually been increasing over the years and reached $150 billion by 4Q 2019 before trending lower to $148 billion as of 4Q 2020.
To make matter worst, GM’s revenue has been spiraling downward from 2015 to 2019 as seen from this article: 5 years analysis of GM revenue breakdown. The effect of both scenarios has caused GM’s long-term asset turnover ratio to worsen at a much faster rate.
On the contrary, Tesla long-term asset turnover ratio has only trended downward from 2015 to 2016. During the same period, Tesla has accumulated assets while having a flat sales, causing assets usage ratio to deteriorate. Fortunately, Tesla sales took off in 2017 when it launched Model 3. Since 2017, Tesla continued to acquire assets as seen from this post: Tesla total debt breakdown and total assets reached $34 billion by the end of 2019.
Although Tesla long-term assets has grown significantly from 2017 to 2019, its sales has grown much faster in the same period, causing the long-term assets turnover ratio to improve as seen from the expanding figures in the chart above. As of 1Q 2020, Tesla’s long-term asset turnover ratio reached 0.27 compared to only 0.22 for General Motors.
In short, Tesla’s long-term assets utilization has been in much better shape than GM’s ratio between 2017 and 2020 despite operating a retail based business model as opposed to GM’s wholesale model which does not own as many retail stores as Tesla does.
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 current and long-term assets to generate sales.
The asset turnover ratio measures the efficiency of a company in assets utilization to generate sales revenue. The higher the ratio, the better the company is in utilizing assets to generate sales since less assets are required to arrive at a certain amount of sales. 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 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 business models which require huge asset bases to run the car manufacturing businesses.
The long-term asset turnover ratio focuses mainly on the fixed or tangible assets of the companies. 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’s 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 utilization despite having to own up a number of retail stores as opposed to GM’s wholesale model which does not require to operate 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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