Will Tesla (NASDAQ:TSLA) possibly go out of business by the end of 2021 or maybe 2022?
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 might happen to their vehicles if Tesla does go out of business.
There are a few things that can topple Tesla.
The most obvious one is debt.
As of 1Q 2021, Tesla has more than $10 billion in both debt and leases in its balance sheets, according to this article: Tesla debt load.
Tesla will certainly go bankrupt if it can’t pay its debt.
Other reasons that may trigger Tesla’s bankruptcy include business deterioration, loss of competitiveness, outdated technology and lawsuits.
While these reasons are valid to some degree, they are difficult to measure and quantify, especially from the perspective of the company’s balance sheets.
How To Uncover Tesla’s Financial Health
One simple and effective approach that can be used to quickly evaluate Tesla’s business condition is to go through the company’s balance sheets.
For example, through the balance sheets, investors can find out about Tesla’s total commitments that will come due within a year from the date the balance sheets were created.
Once these commitments are known, investors can compare these commitments with Tesla’s short-term liquidity and quickly find out if the company’s cash was sufficient to cover these commitments.
If the numbers don’t match up or the difference is huge, for instance, the commitments are vastly greater than the cash on hand, then it may be a red flag.
In this case, investors should dig deeper into the financial reports and find out how the company is going to satisfy all the commitments that come due within a year.
That said, in the following discussions, we are going to dive deep into Tesla’s balance sheets and find out whether the company is on the brink of a financial disaster or the other way around.
Let’s take a look!
Tesla’s Commitments That Come Due In 2021 and 2022
From Tesla’s balance sheets, we can find out about the company’s short-term commitments.
The following snapshot depicts Tesla’s short-term commitments as disclosed in the 1Q 2021 balance sheets:
The short-term commitments or more specifically, current liabilities, are a snapshot of Tesla’s short-term liabilities at the time the balance sheets were prepared.
In Tesla’s case, the balance sheets were dated March 31, 2021, meaning that these short-term liabilities will come due within a year from March 31, 2021.
Therefore, between March 31, 2021, and March 31, 2022, Tesla is required to satisfy all current liabilities that are printed on the balance sheets as shown in the snapshot above.
That said, some of these commitments require Tesla to pay cash while others, such as the deferred revenue and customer deposits, require the company to deliver products.
Therefore, not all commitments are created equal as some are cash-related while some are not.
Additionally, some of the commitments do not even come from customers as Tesla may have outstanding payments for its own employees, suppliers and creditors.
All told, based on the snapshot above, Tesla’s total short-term commitments came to about $15 billion as of fiscal 1Q 2021.
This figure concludes that Tesla is required to deliver a combination of cash and products that are estimated to cost $15 billion between 1Q 2021 or March 31, 2021 and 1Q 2022 or March 31, 2022.
Tesla’s Adjusted Current Liabilities
As mentioned in prior discussions, some of Tesla’s short-term commitments are non-cash.
For example, deferred revenue and customer deposits are the two liabilities that do not involve cash.
Instead, Tesla has already received cash upfront for these liabilities.
Therefore, Tesla’s realistic short-term liabilities are slightly less than the figures shown.
To account for only cash-related liabilities, we will do some adjustments by having these non-cash liabilities be excluded from the total current liabilities.
After doing the adjustments, Tesla’s total short-term liabilities came to about $12.5 billion for fiscal 1Q 2021.
Can Tesla Meet Its Commitments?
The chart above compares Tesla’s cash and cash equivalents with the adjusted current liabilities for the fiscal quarter 1Q 2021.
According to the chart, Tesla has total cash and cash equivalents of $17 billion as of fiscal 1Q 2021.
On the other hand, Tesla’s total short-term commitments came to about $12.5 billion as shown in the chart above.
Therefore, Tesla’s total cash is much greater than the total adjusted current liabilities.
In fact, Tesla has a cash leftover that totaled nearly $5 billion after accounting for all short-term liabilities.
In other words, with all the available cash, Tesla can meet its short-term commitments that come due within a year.
Tesla’s Other Liquid Assets
Aside from cash, Tesla’s liquid assets are made up of other assets such as accounts receivable and inventory as shown in the snapshot above.
These are liquid assets that are expected to be converted into cash in a year.
Therefore, they are as handful as cash and cash equivalents and they certainly can help Tesla to cover a portion, if not all, of the short-term commitments.
Therefore, if we have accounted for these liquid assets, Tesla’s total liquid assets would be much greater and would come to about $23 billion as of fiscal Q1 2021.
At this level of liquid assets, Tesla’s total liquid assets would be more than sufficient to satisfy its adjusted short-term commitments.
Tesla’s Liquid Assets Vs Current Liabilties
The chart above shows Tesla’s total liquid assets comparison with the adjusted current liabilities.
According to the chart, Telsa’s total liquid assets came to about $23 billion after accounting for accounts receivable and inventory.
On the other hand, Tesla’s adjusted current liabilities totaled only $12.5 billion.
Therefore, Tesla can more than satisfy its future commitments with the massive liquid assets.
In fact, Tesla will have a surplus of over $10 billion in liquid assets if the company decided to pay off the adjusted current liabilities.
In short, Tesla’s financial health is intact.
Again, will Tesla possibly go out of business in 2021 or 2022?
Based on the analysis above, the answer is not likely since the company’s available liquid assets reported in fiscal 1Q 2021 were more than enough to cover the coming liabilities.
This scenario will remain so provided that Tesla’s operations would not be severely affected in the next 12 months.
If one of Tesla’s Gigafactory was blown apart by terrorists, then it would be a different story.
In that case, Tesla’s operations would be stalled and its cash flow conversion cycle would be severely affected.
Therefore, Tesla may go under if the terrorist-attack scenario does play out.
However, for now, Tesla’s financial health remains as solid as a rock and there is nothing to be worried about.
References and Credits
1. All financial figures in this article were obtained and referenced from Tesla’s quarterly and annual reports which can be obtained at Tesla SEC Filings.
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