Is Tesla Nearly Bankrupt?
New Year’s Eve presents the opportunity to, as a friend of mine said, “get into a car and race all of the drunks back home.” Something I hope we all avoid (hey- use Uber).
As we turn the page and move into 2018, it’s an appropriate time to ask the question: Is Tesla bankrupt?
What does bankrupt mean, exactly?
Bankruptcy can be defined as a legal proceeding involving a business that cannot pay its debts. In this legal process, the debtor may be able to get some creditors to forgive debt repayments, while other creditors may negotiate and accept different repayment terms. Those terms might include a longer repayment period, a lower interest rate on the debt, or a reduced principal repayment amount.
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So, if a company has more debt than it can pay back, it may declare bankruptcy- or be forced into bankruptcy by its creditors.
The critical need for operating cash flows
While all businesses must be able to earn a profit (eventually), it’s even more important to generate cash from day-to-day operations. If you own a chain of retail sporting goods stores, for example, you need to generate the vast majority of your cash inflows from selling sporting goods. If you happen to sell a warehouse, the cash inflow is non-operating, which is not a sustainable source of cash.
So, can Tesla generate enough cash to pay its debts?
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Third quarter results
Tesla generated $2.98 billion in revenue (a 30% increase from the prior year), and recorded a record level of orders and deliveries of its Model S and Model X cars. Good news. However, the firm posted a loss of $619 million, or an adjusted loss of $2.92 per share in the 3rd quarter of 2017. Telsa had a $21 million gain a year before.
How about cash? Entering the 4th quarter, Tesla had a cash balance of $3.5 billion, and the company expects 4th quarter capital expenditures (which may require a big cash outlay) of $1 billion.
Solvency and liquidity
Two key metrics to judge a company’s ability to thrive over the long term are liquidity and solvency. Liquidity refers to a firm’s ability to use current assets (cash, accounts receivable, etc.) to pay off current liability (like accounts payable).
Tesla’s 3rd quarter 2017 balance sheet indicates current assets of 5.17 billion and current liabilities of 2.21 billion, so liquidity seems ok- but this is only a short-term metric. Think about your checkbook.
Solvency refers to a company’s ability to finance debt repayments and capital expenditures over the long term. In Tesla’s case, this refers to the $1 billion capital expenditure next year, and years into the future. The balance sheet also reveals 2.91 billion in long-term debt.
Can Tesla generate enough cash to operate and meet these long-term needs?
Conclusion
Given the current cash position, potential firm growth in sales and earnings, I think Tesla can meet its obligations- and is not bankrupt.
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
(you tube channel) kenboydstl
This post was originally posted on my Quora page. This post is for educational purposes only.
Image: Bullseye, Jeff Turner CC by 2.0