Will Tesla (NASDAQ:TSLA) possibly go out of business by the end of 2020 or maybe 2021?
That’s a question that is often pondered by both investors and Tesla’s vehicle owners.
For investors, they are concerned about Tesla’s liquidity and the company’s cash flow, particularly during the age of the COVID-19.
For vehicle owners, they are worried about what will happen to their vehicles if Tesla does go out of business.
There are a few things that can topple Tesla. However, the most obvious one is debt. As of 2Q 2020, Tesla carried more than $16 billion in both debt and leases in its balance sheets, according to this article: Tesla debt load.
Tesla will go bankrupt if it failed to satisfy its commitments or liabilities that come due in 2020 and 2021.
Tesla’s commitments that come due in 2020 and 2021
One simple and effective approach that can be used to quickly analyze Tesla’s total commitments that come due in 2020 and 2021 is to look at the current liabilities disclosed in the balance sheets. For Tesla, the current liabilities can be found in almost every quarterly and annual filings.
The following snapshot shows Tesla’s latest current liabilities as disclosed in the 2Q 2020 quarterly filings:
The current liabilities section in the balance sheets discloses future cash payments or product deliveries that the company must settle within a year’s time frame.
These payments or commitments can come due as soon as in Q3 2020 or as late as in Q2 2021 but all are within the next 12 months from the date the current financial period ended.
In this case, the current liabilities shown in the snapshot above ended on June 30, 2020, which means that all the liabilities disclosed must be fully met by June 30, 2021.
As seen from the snapshot above, Tesla’s expected liabilities that will come due in a year totaled $12.3 billion.
Of this amount, $3.6 billion comes from accounts payable, one of the largest current liabilities as of 2Q 2020. Accounts payable are purchases that Tesla made in 2020 or earlier but haven’t been paid yet.
The other current liabilities that are as large as the accounts payable are the current portion of debt and finance leases that total $3.7 billion.
Similarly, Tesla is expected to shell out as much as $3.1 billion for the accrued liabilities that will come knocking in the next 12 months.
Now comes the big question. With current liabilities totaling more than $12 billion as of 2Q 2020, do you expect Tesla to shell out $12 billion of cash for payment within the next 12 months?
Theoretically, the answer is yes but realistically, not likely. The reason is that not all liabilities are created equal.
Tesla’s adjusted current liabilities
Highlighted in the snapshot above, some of the liabilities are non-cash, including deferred revenue and customer deposits.
These liabilities do not take cash out of the company as Tesla has already received cash upfront.
As a result, cash-related liabilities that will come due in the next 12 months are going to be slightly smaller than the total current liabilities.
In this case, Tesla will only need about $10 billion of cash to settle the liabilities, including debt and leases that come due within the next 12 months.
Tesla’s cash equivalents vs adjusted current liabilities
The chart above compares Tesla’s cash and cash equivalents with the adjusted current liabilities in 2Q 2020.
According to the chart, Tesla’s cash and cash equivalents of $8.6 billion are pretty much in a shortfall against the adjusted liabilities of $10.3 billion.
In other words, Tesla’s current cash position is not sufficient to cover the expected future cash payments that come due within a year.
While the chart above shows that Tesla’s cash on hand is in a shortfall, this condition is only true if we look at only a single type of asset in the balance sheet which in this case, the cash and cash equivalents.
While it is good to have enough cash equivalents to cover the expected liabilities, this may not be the case for most companies, especially for Tesla which has been unprofitable consistently in the past.
Tesla’s other liquid assets
Tesla’s cash and cash equivalents alone may not be enough to cover all future cash payments. However, it is a different story if we included other semi-liquid assets such as restricted cash, accounts receivable and inventory.
These assets are near cash or cash forms which are expected to be converted to cash fairly easily in the next 12 months.
For example, the accounts receivable are basically cash owed by Tesla’s customers in which the company can expect to collect within the next 12 months.
Similarly, the inventory is another type of liquid asset that can be turned into cash instantly, which is when sales occur.
Tesla’s adjusted current assets vs adjusted current liabilties
The chart above shows the finalized current assets versus the expected cash payments that will come due in 2020 and 2021.
As seen from the chart, the adjusted liquid assets totaled more than $14 billion after accounting for other semi-liquid assets such as accounts receivable and inventory in addition to cash and cash equivalents.
As of 2020 2Q, Tesla’s adjusted liquid assets will be more than enough to cover the expected cash outflow which approximately totaled $10.3 billion in the next 12 months.
In fact, Tesla will have a surplus of more than $3 billion in liquid assets after accounting for the adjusted current liabilities.
In short, Tesla can pay its debt with its existing cash equivalents and some of its semi-liquid assets.
Again, will Tesla possibly go out of business in 2020 or 2021?
Based on the analysis above, the answer is not likely since the company’s existing liquid assets are more than enough to cover the coming liabilities.
This scenario will remain so provided that Tesla’s operations are not severely affected and that sales can continue to generate cash for the company in the next 12 months.
References and Credits
1. All financial figures in the charts in this article were referenced from Tesla Q2 2020 financial results.
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