Will Tesla go out of business in 2020? That’s a question that is often asked by not only investors but also Tesla’s vehicle owners. From the perspective of investors, they are concerned about the company’s liquidity and cash flow, especially after the COVID-19 outbreak which has almost crippled the automotive industry. On the other hand, Tesla’s vehicle owners are worried what will happen to their vehicles if Tesla does go out of business.
In this regard, there are many ways to find out whether Tesla can survive through 2020. Basically, the question of whether Tesla can survive in 2020 boils down to the company’s ability to satisfy all of its commitments that will come due in 2020. In other words, Tesla will most likely go bankrupt if it failed to service or refinance its debts as well as other liabilities that come due. On the other hand, the company will survive if it has more cash on hand and other liquid assets than all the liabilities that it has to satisfy in 2020.
The liabilities here can be in the forms of debts repayment, interest expenses, leases and some of the purchases that have already been incurred and yet to pay in 2020.
Tesla’s total commitments that come due in 2020
One simple and effective approach that can be used to fast analyze the company’s total commitments in 2020 is to look at the current liabilities section disclosed in the financial statements. For Tesla, the current liabilities can be found in almost every quarterly and annual filings.
Since we wanted to determine Tesla’s current liabilities that will come due in 2020 or within a year, we will look at the latest possible financial filing and in this case, it was the 4Q 2019 statement as of this article was published.
Here is a snapshot of what Tesla’s current liabilities look like in the 4Q 2019 annual report:
The current liabilities are basically expected future payments that the company will need to settle within a year. These payments can come due as soon as in Q1 2020 or as late as in Q4 2020 but all are within the next 12 months from the date the financial statement was created. In this case, the Q4 2019 filing was created on Dec 31st, 2019.
With this said, Tesla is expected to have the cash ready by the due date so that the company can make the cash payment by then.
As seen from the snapshot above, Tesla’s expected total liabilities that will come due in a year totaled $10.7 billion. Of this amount, $3.8 billion came from accounts payable which was also the largest liability as of Q4 2019. Basically, accounts payable are purchases of raw materials and supplies that Tesla made in 2019 or earlier but haven’t paid yet.
Therefore, Tesla is expected to make the payments to these suppliers with cold hard cash comes the due date.
The 2nd largest liability went to accrued liabilities which totaled $2.9 billion as of 4Q 2019 and is also another form of liability similar to accounts payable. Accrued liabilities were basically expenses that Tesla has incurred in 2019 or earlier but has yet to pay.
Similarly, Tesla is expected to have the cash ready comes the due date to pay for the accrued liabilities.
Another form of liability which is also the 3rd largest totaled more than $1.7 billion and these are basically debts and leases payments that will come due within a year.
Now comes the big question. With all the liabilities recorded as of 4Q 2019 which totaled more than $10 billion, do you expect Tesla to shell out $10 billion of cash as payment within the next 12 months?
Well, theoretically, the answer is yes but realistically, not likely. The reason is that not all liabilities are created equal.
Tesla’s adjusted current liabilities
So what will be the exact amount of current liabilities that is expected out of Tesla in the next 12 months? The answer lies in some of the liabilities in the snapshot above which are largely non-cash related.
As pointed out in the snapshot above, liabilities such as deferred revenue, resale value guarantees and customer deposits are non-cash items which means that they do not take cash out of the company during the normal course of the business operation. These items will only post a threat when Tesla goes into liquidation. The reason is that cash has already been received upfront for these liabilities.
As a result, the exact liabilities that will come due in the next 12 months are going to be slightly smaller which in this case, will be $8.5 billion to be exact after subtracting all the non-cash liabilities.
Therefore, with the exact liabilities determined, we can now proceed to figuring out whether Tesla has the cash to satisfy the expected payments in 2020.
Tesla’s existing cash vs payments come due in 2020
To find out whether Tesla will go out of business in 2020, all we need to do is to compare the company’s existing cash and cash equivalents in the current assets section of the balance sheet with all the liabilities due in 2020, which in this case is $8.5 billion as determined in prior discussion.
In this regard, I have created the chart above that shows the comparison between Tesla’s cash and cash equivalents as of Q4 2019 and the incoming liabilities that come due in the next 12 months.
As seen from the chart, Tesla’s existing cash and cash equivalents is pretty much in shortfall against the amount due. In other words, Tesla’s existing cash position will not be enough to cover the future expected cash payments due in a year.
In the current example, Tesla’s expected cash payment in 2020 will be $8.3 billion whereas Tesla’s existing cash and cash equivalents was only $6.3 billion. In this case, Tesla will be short of roughly $2 billion in cash to cover the expected future cash payment in 2020.
While the chart above shows that Tesla’s cash amount is in shortfall, this condition is only true if we only look at a single type of asset in the balance sheet which in this case, is the cash and cash equivalents. While having enough cash to cover the expected liabilities is good as cash is the most liquid type of asset, 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
Since existing cash and cash equivalents will not be enough to cover Tesla’s incoming payments, we will include the company’s other asset types in our analysis. In this case, we will lump in other current assets such as restricted cash, accounts receivable and inventory as shown in the snapshot above.
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 expects to collect within the next 12 months. Similarly, the inventory is another liquid asset that will turn into cash when sales occur.
Tesla’s total liquid assets vs payments come due in 2020
The chart above shows the finalized liquid assets versus the expected payments due in 2020.
As seen from the chart, the adjusted liquid assets shot up to more than $11 billion after accounting for other asset types such as accounts receivable and inventory in addition to cash and cash equivalents.
In this case, Tesla’s total liquid assets will be more than enough to cover the expected cash outflow in the next 12 months. In fact, Tesla will have a surplus of roughly $3.5 billion of assets after accounting for these liabilities.
Will Tesla go out of business in 2020? From the analysis above, the answer is not likely since the company’s existing liquid assets should be more than enough to cover the liabilities due in the next 12 months.
This scenario will likely remain so provided that Tesla can successfully convert some of the current assets to cash and there is no disruption to the business operations.
References and Credits
1. All financial figures in the charts and tables in this article were referenced from Tesla Q4 2019 Quarterly Filing.
2. Featured images in this article are used under creative commons license and sourced from the following websites: mangopulp2008.
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