Tesla Stock: Capital Structure Analysis
Tesla Stock: Capital Structure Analysis
Tesla Stock: Capital Structure Analysis
By
TK MCDONALD
Reviewed by
ERIC ESTEVEZ
Once the darling of the last decade, Tesla’s (TSLA) balance sheet and capital
structure have been a cause for concern for analysts and investors. Take a
look at the company's financials and you may think the company is in serious
trouble. In the spring of 2013, Tesla’s stock share price shot into the
stratosphere from a range of $20 to $30 over the previous few years to a high
of $190.90. In 2015, the share price kept climbing to $280.02. In April 2016,
the share price had been hovering around $250, and in December 2017
climbed even higher to around $340. But that price is a simple matter of
history. As of August 2019, the stock was hovering just past the $200-mark,
closing at $213.10 on Aug. 27, 2019. The stock's track record still has most
investors wondering if it will climb higher and reach the lofty highs it once
had. The answer may lie in the stock's underlying capital structure.
KEY TAKEAWAYS
Tesla's Beginnings
The popularity of the Tesla success story is widely known. Tesla did what the
Big Three could not: produce a quality electric vehicle that is in huge demand.
The startup electric-vehicle car company did what no other manufacturer in
the world could do: produce an all-electric vehicle in huge demand.
The company was founded in 2003 but didn't release its first car—the
Roadster—until five years later. In 2012, the company moved from the
Roadster to the Model S sedan. That same year, Tesla also built charging
stations in both the U.S. and Europe, allowing Tesla owners to charge their
vehicles for free. As of 2019, the company has several models on the market
including the Model S, Model 3, Model X, and the Model Y set for release in
2020.
Tesla was founded by two engineers, Martin Eberhard and Marc Tarpenning
who named the company Tesla Motors. It caught the attention of PayPal co-
founder Elon Musk, who invested millions during the early rounds of funding.
Musk eventually became chair of the company before taking on the role of
the chief executive officer (CEO).
Auto manufacturers require huge amounts of capital to invest into the actual
manufacturing process. While the Big Three automakers have established
factories, Tesla has to fuel its expansion by leveraging debt. The company's
debt ballooned, exploding from $598 million in 2013 to nearly $10 billion in
2018. The company ended 2018 with a total of $3.7 billion in cash and cash
equivalents. As of the end of 2018, its debt-to-equity (D/E) ratio was
1.63%, which is lower than the industry average. However, the market
valuation of Tesla is overvalued, providing a lower ratio than other well-
established automakers.
Shareholder Equity
Institutional investors hold 63% of Tesla's shares. At the end of 2018, the
company had a capital surplus of $10.2 billion, with just over $4.9 billion in
stockholder equity. Tesla's market cap, as of August 2019, is $38.817 billion.
To fund the expansion of manufacturing facilities for its cars and batteries, the
company is not expecting to make a big profit until 2020. Tesla's return on
equity (ROE) is -9.54%, return on assets (ROA) is 0.70%, and profit margin is
-2.64%, though its quarterly revenue growth year over year (YOY) as of
2018 was 58.70%.
With the debt ratio, more liabilities mean less equity and therefore indicate a
more leveraged position. The problem with this measurement is that it is too
broad in scope and gives equal weight to operational liabilities and debt
liabilities.
The same criticism applies to the debt-to-equity ratio. Current and non-
current operational liabilities, especially the latter, represent obligations that
will be with the company forever. Also, unlike debt, there are no fixed
payments of principal or interest attached to operational liabilities.
On the other hand, the capitalization ratio compares the debt component to
the equity component of a company's capital structure; so, it presents a truer
picture. Expressed as a percentage, a low number indicates a healthy equity
cushion, which is always more desirable than a high percentage of the debt.
However, because investors are better off putting their money into companies
with strong balance sheets, it makes sense that the optimal balance generally
should reflect lower levels of debt and higher levels of equity.
About Leverage
In finance, debt is a perfect example of the proverbial two-edged sword.
Astute use of leverage (debt) is good. It increases the number of financial
resources available to a company for growth and expansion.
Not only is too much debt a cause for concern, but too little debt can be as
well. This can signify that a company is relying too much on its equity and not
efficiently making use of its assets.
Credit-Rating Agencies
Fortunately, though, there are excellent resources that can help determine if
a company might be too highly leveraged. The primary credit-rating agencies
are Moody's, Standard & Poor's (S&P), and Fitch. These entities conduct
formal risk evaluations of a company's ability to repay principal and interest
on debt obligations, primarily on bonds and commercial paper.1
Credit agencies will typically distinguish between investment grade and non-
investment grade ratings.2
So, as an investor, you should be happy to see high-quality rankings on the
debt of companies that you're considering as investment opportunities,
likewise, you should be wary if you see poor ratings on companies that you
are considering.
Reviewed by
MARGUERITA CHENG
Fact checked by
SUZANNE KVILHAUG
Tesla Inc. (TSLA) is an American electric car and power train designer,
developer, manufacturer, and distributor headed by serial entrepreneur Elon
Musk. The company was founded in 2003 and is headquartered in Palo Alto,
California.
KEY TAKEAWAYS
Tesla has been seeing marked growth of late, after years of breakeven
performance. Tesla beat Wall Street’s earnings expectations in the second
quarter of 2021, generating $1.1 billion in the second quarter (on a GAAP
basis), doubling the $438 million it generated in the first quarter. During the
second quarter of 2020, Tesla generated just $100 million in income. Using
adjusted figures (non-GAAP), Tesla reported $1.6 billion in income for the
second quarter, up from $1.1 billion in the first quarter of 2021 and $451
million in the second quarter of 2020.2 3
On November 15, 2021, President Biden signed into law the Infrastructure
Investment and Jobs Act. The bipartisan infrastructure bill authorizes $1.2
trillion in spending, including funding the following initiatives:
The legislation is good news for Tesla and other U.S. EV manufacturers since
it will accelerate the deployment of EV chargers nationwide along highways
and within local communities. The legislation is designed to increase EV
adoption by expanding the network of EV chargers to 500,000 nationwide. 4
Several other carmakers are now active in the EV space, including Honda,
Hyundai, Kia, Mazda, Volkswagen, and Volvo. Traditional car companies are
increasing their offerings of hybrid gasoline-electric cars as well as pure
electric vehicles—such as the Nissan Leaf. Still, Tesla cars carry with them a
certain high-status cache that has not yet been reproduced by the incumbent
automakers.
Note that Tesla’s Model S ranked eighth with 3.9% of the market share. All
together, Tesla’s four EVs had 64.6% of the market during the second
quarter. Granted, there are other high-end EVs on the market, such as the
Porsche Taycan, Audi e-tron, BMW i3, and Jaguar I-Pace, but they still
command a small fraction of the market. Altogether, those four EVs had 5.7%
of the market share in the second quarter. 1 0
Future Competition
During its 2021 second-quarter earnings call, Tesla said that it would start
production of its Cybertruck (an EV pickup) in 2022. It also plans to start
production of its electric semi-tractor truck next year. 1 1
In the electric pickup market, Tesla will face increased competition as both
Ford and GM are also working on EV trucks. Both announced in 2021 (in May
and April, respectively), that they would offer their signature trucks in full EV
form.1 2 1 3
Two teams of five players each try to score by shooting a ball through a hoop elevated
10 feet above the ground.
The game is played on a rectangular floor called the court, and there is a hoop at each
end.
The court is divided into two main sections by the mid-court line.
If the offensive team puts the ball into play behind the mid-court line, it has ten seconds
to get the ball over the mid-court line.
Once the offensive team gets the ball over the mid-court line, it can no longer have
possession of the ball in the area behind the midcourt line.
The ball is moved down the court toward the basket by passing or dribbling. The team
with the ball is called the offense. The team without the ball is called the defense.
The defense tries to steal the ball, contest shots, deflect passes, and garner rebounds.
Points
When a team makes a basket, they score two points and the ball goes to the other team.
If a basket, or field goal, is made outside of the three-point arc, then that basket is worth
three points. A free throw is worth one point.
Free throws are awarded to a team according to some formats involving the number of
fouls committed in a half and/or the type of foul committed.
Fouling a shooter always results in two or three free throws being awarded the shooter,
depending upon where he was when he shot. If he was beyond the three-point line, then
he gets three shots.
Other types of fouls do not result in free throws being awarded until a certain number
have accumulated during a half (called “team fouls”).
Once that number is reached, then the player who was fouled is awarded a '1-and-1'
opportunity. If he makes his first free throw, he gets to attempt a second. If he misses
the first shot, the ball is live on the rebound.
Game Clock
Each game is divided into sections, and all levels have two halves.
In high school and below, the halves are divided into eight (and sometimes, six) minute
quarters. In the pros, quarters are twelve minutes long.
There is a gap of several minutes between halves. Gaps between quarters are relatively
short.
If the score is tied at the end of regulation, then overtime periods of various lengths are
played until a winner emerges.
The game begins with one player from either team at center court.
A referee will toss the ball up between the two. The player that gets his hands on the
ball will tip it to a teammate. This is called a tip-off.
FOULS
Hitting
Pushing
Slapping
Holding
Illegal pick/screen -- when an offensive player is moving. When an offensive player
sticks out a limb and makes physical contact with a defender in an attempt to block the
path of the defender.
Personal foul penalties: If a player is shooting while a being fouled, then he gets two free
throws if his shot doesn't go in, but only one free throw if his shot does go in.
Three free throws are awarded if the player is fouled while shooting for a three-point
goal and they miss their shot. If a player is fouled while shooting a three-point shot and
makes it anyway, he is awarded one free throw. Thus, he could score four points on the
play.
Inbounds. If fouled while not shooting, the ball is given to the team the foul was
committed upon. They get the ball at the nearest side or baseline, out of bounds, and
have 5 seconds to pass the ball onto the court.
One & one. If the team committing the foul has seven or more fouls in the game, then
the player who was fouled is awarded one free throw. If he makes his first shot, then he
is awarded another free throw.
Ten or more fouls. If the team committing the foul has ten or more fouls, then the fouled
player receives two free throws.
Charging. An offensive foul that is committed when a player pushes or runs over a
defensive player. The ball is given to the team that the foul was committed upon.
Blocking. Blocking is illegal personal contact resulting from a defender not establishing
position in time to prevent an opponent's drive to the basket.
Flagrant foul. Violent contact with an opponent. This includes hitting, kicking, and
punching. This type of foul results in free throws plus the offense retaining possession of
the ball after the free throws.
Intentional foul. When a player makes physical contact with another player with no
reasonable effort to steal the ball. It is a judgment call for the officials.
Technical foul. Technical foul. A player or a coach can commit this type of foul. It does
not involve player contact or the ball but is instead about the 'manners' of the game.
Foul language, obscenity, obscene gestures, and even arguing can be considered a
technical foul, as can technical details regarding filling in the scorebook improperly or
dunking during warm-ups.
VIOLATIONS
Walking/Traveling. Taking more than 'a step and a half' without dribbling the ball is
traveling. Moving your pivot foot once you've stopped dribbling is traveling.
Carrying/palming. When a player dribbles the ball with his hand too far to the side of or,
sometimes, even under the ball.
Double Dribble. Dribbling the ball with both hands on the ball at the same time or
picking up the dribble and then dribbling again is a double dribble.
Held ball. Occasionally, two or more opposing players will gain possession of the ball at
the same time. In order to avoid a prolonged and/or violent tussle, the referee stops the
action and awards the ball to one team or the other on a rotating basis.
Goaltending. If a defensive player interferes with a shot while it's on the way down
toward the basket, while it's on the way up toward the basket after having touched the
backboard, or while it's in the cylinder above the rim, it's goaltending and the shot
counts. If committed by an offensive player, it's a violation and the ball is awarded to the
opposing team for a throw-in.
Backcourt violation. Once the offense has brought the ball across the mid-court line,
they cannot go back across the line during possession. If they do, the ball is awarded to
the other team to pass inbounds.
Time restrictions. A player passing the ball inbounds has five seconds to pass the ball. If
he does not, then the ball is awarded to the other team. Other time restrictions include
the rule that a player cannot have the ball for more than five seconds when being closely
guarded and, in some states and levels, shot-clock restrictions requiring a team to
attempt a shot within a given time frame.
Player Positions
Center. Centers are generally your tallest players. They generally are positioned near the
basket.
Offensive -- The center's goal is to get open for a pass and to shoot. They are also
responsible for blocking defenders, known as picking or screening, to open other players
up for driving to the basket for a goal. Centers are expected to get some offensive
rebounds and put-backs.
Forward. Your next tallest players will most likely be your forwards. While a forward
may be called upon to play under the hoop, they may also be required to operate in the
wings and corner areas.
Offensive -- Forwards are responsible to get free for a pass, take outside shots, drive for
goals, and rebound.
Guard. These are potentially your shortest players and they should be really good at
dribbling fast, seeing the court, and passing. It is their job to bring the ball down the
court and set up offensive plays.
Offensive -- Dribbling, passing, and setting up offensive plays are a guard's main
responsibilities. They also need to be able to drive to the basket and to shoot from the
perimeter.
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Basketball Rules
Basketball dates back as far as 1891 and since then has evolved into a sport played
around the world. Many countries have adopted the game such as Russia, Great
Britain, Germany, Spain and parts of Asia, but it is America where the biggest and most
lucrative league in the world lives: the NBA (National Basketball Association).
The court is a rectangular shaped and measures 91 feet long and 50 feet wide. There is
a halfway line in which a small circle is found in the centre; this is where the game starts
with a tip off (the ball is thrown in the air by the referee and a player from each team
tries to win possession for their team). At each end of the court are two baskets both 10
feet in height. A three point arc is the outside ring, whilst in the middle of that is the key
which includes a free throw line.
All that is needed to play is a court and basketball. Teams must wear matching strips
with some players choosing to wear gum shields and face masks for protection.
The game is split up into 4 twelve minute quarters. In between the 2 nd and 3rd quarter
is a 15 minute half time interval.
Scoring
There are three scoring numbers for basketball players. Any basket scored from outside
the three point arc will result in three points being scored. Baskets scored within the
three point arc will result in two points being scored. Successful free throws will result in
1 point being scored per free throw. The number of free throws will depend on where
the foul was committed.
Rules of Basketball
Each team can have a maximum of 5 players on the court at any one time. Substitutions
can be made as many times as they wish within the game.
The ball can only be moved by either dribbling (bouncing the ball) or passing the ball.
Once a player puts two hands on the ball (not including catching the ball) they cannot
then dribble or move with the ball and the ball must be passed or shot.
After the ball goes into a team’s half and they win possession back the ball must then
make it back over the half way line within 10 seconds. If the ball fails to do so then a foul
will be called and the ball will be turned over.
Each team has 24 seconds to at least shot at the basket. A shot constitutes either going
in the basket or hitting the rim of the basket. If after the shot is taken and the ball fails to
go in the basket then the shot clock is restarted for another 24 seconds.
The team trying to score a basket is called the offence whilst the team trying to prevent
them from scoring is called the defence. The defence must do all they can to stop the
offence from scoring by either blocking a shot or preventing a shot from being fired.
After each successful basket the ball is then turned over to the opposition.
Fouls committed throughout the game will be accumulated and then when reached a
certain number will be eventually be awarded as a free throw. A free throw involves one
playerfrom the offensive team (the player fouled) to take a shot unopposed from the free
throw line. Depending on where the foul was committed will depend on the number free
throws a player gets.
Violations in basketball include travelling (taking more than one step without bouncing
the ball), double dribble (picking the ball up dribbling, stopping then dribbling again with
two hands), goaltending (a defensive player interferes with the ball travelling downwards
towards the basket) and back court violation (once the ball passes the half way line the
offensive team cannot take the ball back over the half way line).