The objective of this analysis is to review the 10k annual report of the company in order to identify the company’s performance and position in the market. The review will include company growth, profitability, and liquidity. Various liquidity ratios are employed to give a vivid picture of company performance and that of its close competitors and the industry average. Tesla is a renowned motor company that was founded in Delaware on July 1 st, 2003 and partakes in designing, developing and manufacturing of high-performance fully electric automobiles (Tesla Inc., 2017). The company also manufactures advanced electric vehicle power train components. At a glance, the company has been performing well and appeals to many investors in the market over the years which has helped it expand and grow in asset base and market share.
Company Mission
“ Tesla’s mission is to accelerate the world’s transition to sustainable transport."
Review of Managerial Discussion & Analysis
When it comes to automobiles, the company production capacity increased in the year 2017 by 20%, therefore, producing more units for sale of the high power vehicles; Model S, Model X, and Model 3. The increase in production is a positive sign of continuous yearly growth of the company. On Energy Generation and Storage, the company in 2017 was able to undertake the installation of the largest battery globally which was installed in South Australia. The company was also able to generate 523 MW and distribute 358 MWh of energy storage products. It is an indicator of increased capacity and development in energy generation and storage (Tesla Inc., 2017). The company projects to increase automotive production and also its energy generation and storage capacity over the next few years.
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The company has successfully issued loans and leases for its vehicles in certain markets in Europe, Asia, North America, and Europe through various financial institutions. The issuance of car loans has increased on the sales volume and it is a boost to the company as it aims at attaining in target sale volume and increases its sales over the years. The company also through third-party contractual agreement is able to offer to its customer a chance to purchase its solar systems or energy that the company solar systems produce (Tesla Inc., 2017). The customers enter into contractual agreements with thirds parties that pay the company on behalf of the customers.
Tesla Revenue Schedule
| Revenues | Year 2017 | Year 2016 |
| Automotives Sales | 8,534,752 | 5,589,007 |
| Automotive Leasing | 1,106,548 | 761,759 |
| Total automotive revenues | 9,641,300 | 6,350,766 |
| Service and Other | 1,001,185 | 467,972 |
| Total automotive & service | 10,642,485 | 6,818,738 |
| Energy generation and storage | 1,116,266 | 181,394 |
| Total revenues | 11,758,751 | 7,000,132 |
In the year 2017, the company vehicle sales rose by 53% with a margin of $2.95 billion in comparison to 2016. The growth can be attributed to a 58% growth in car deliveries. The total car deliveries in the year 2017 were approximately 80,060 vehicles that were are a result in Model X and Model S sales and moreover the launch of Model 3 that attained 1764 sales during the year. There was a credit offset of 360.3 million during the year which increased the revenue collected. The leasing revenues collection increased by 45 percent to 334.8 million during the 2017 accounting period (Tesla Inc., 2017). The increase can be attributed to an increase in the number of cars under the leasing program with about 30% in comparison with the year 2016 resale value and lease programs.
Moreover, during the year 2017, there was an increase in the automotive leasing revenue of about 23.4 million when compared to 2016. When we look at service and other revenue there was a 114% increase to 533.2 million in comparison to the year ended December 2016. The increase in service and other revenues can be attributed to an increase in automotive sales because of the growth and expansion of the company trade-in program. Moreover, the company collected 41.1 million that was attributed to the Grohmann engineering service revenue which was acquired the same year (Tesla Inc., 2017).
When it comes to Energy generation and storage revenue, there was a 515% increase in the year of about $934.9 million in comparison with year December 2016. The large increase in revenues can be primarily attributed to the inclusion of the company solar business full-year revenue that was attained after the acquisition of SolarCity (Tesla Inc., 2017).
| Costs | Year 2017 | Year 2016 |
| Automotives Sales | 6,724,480 | 4,268,087 |
| Automotive Leasing | 708,224 | 481,994 |
| Total automotive revenues | 7,432,704 | 4,750,081 |
| Service and Other | 1,229,022 | 472,462 |
| Total automotive & service | 8,661,726 | 5,222,543 |
| Energy generation and storage | 874,538 | 178,332 |
| Total revenues | 9,536,264 | 5,400,875 |
| Gross Profit | 2,208,596 | 1,600,685 |
| 23% | 25% |
Cost of revenues
The cost of revenue for automobiles increased during the year by about 58% because of the increase in the number of automotive units sold. There were more deliveries in 2017 compared to 2016 that caused the cost of revenues to increase with high margin. The cost of automotive leasing revenue also rose by 47% because of a 30% increase in sales under the program (Tesla Inc., 2017). The cost of services and other revenue rose with a high margin of about 160% which can be attributed to the increase in the sale of used vehicles.
Gross Margin
The gross margin level decreased to 23% from 25% of the previous year. The decrease can be attributed to an increase in the cost of revenues during the year (Tesla Inc., 2017). The gross margin for total automotive services and other segments significantly decreased to 19% from 23% in 2017.
Ratio Analysis
Companies employ various tools in measurement of performance and evaluation of how healthy a company is. One of the key tools applied is Ratio analysis. Ratios are calculated and are used in establishing the performance of the company, its trends and how it compared to other companies in the industry. Ratios are used together with financial reports because they give a clear representation of what is in the reports and make it easier for information users to understand the company trends and health. The following liquidity and profitability ratios are analyzed;
| Liquidity | 2017 | 2016 |
| Current | 0.86 | 1.07 |
| Quick Ratio | 0.56 | 0.72 |
| Profitability | ||
| Net profit Margin | -16.68% | -9.64% |
| Return on Capital Employed | -8.9% | -6.3% |
Liquidity Ratios
These ratios are useful in determining the solvency of the company. When a company is liquid it means that it can easily meet its current obligation without difficulties. When a company is not liquid then it will have challenges in sorting out its current obligations. The two most use liquidity ratios are the quick and current ratios.
Current Ratio
It is the most commonly used liquidity ratio that helps in establishing the company ability to meets its current obligations. The ratio can be calculated using the company current liabilities and assets and when calculated any value that is greater than 1 means that the company is performing well and is able to settle its short term obligations without difficulties. The vice versa is true and companies with a current ratio less than 1 are likely to face difficulties settling their current obligations. Tesla company current ratio decreases in 2017 compared to 2016 indicating decreasing liquidity.
Quick Ratio
Similar to the current ratio, this liquidity ratio determines the ability of the company to settle its current debts using the most liquid assets that are held by the company. The quick ratio indicates the extent at which the firm’s short term debts are cushioned against the company’s current assets. Generally, after calculating the ratio, any amount less than 1 is an indicator of strong dependency on inventory in meeting current obligations. The company has a higher dependency on debts in 2017 compared to 2016.
Profitability Ratios
The profitability ratios are one of the most useful ratios used in company analysis for investment purpose as they give a vivid picture of the company profitability trend and performance. The ratios can be easily compared over the years and also in relation to the competitors and industrial average. There is a need for a potential investor to know how a company is performing solely and also in the market in order to identify if the company is a viable investment option. The two key ratios that are commonly looked at under this category are; return on capital employed ratio and net profit margin ratio.
Net Profit Margin
Net profit is important to investors and other stakeholders as it determines what amount the shareholders attain as dividends. The purpose of a business is attaining profits by utilizing the resources that have been provided. The net profit margin thus is determined by dividing the company net income by the net revenue collected in that accounting period. The main objective of the ratio is identifying the capability of a firm in converting sales made into earnings for the firm owners. Potential inventors wan to put their resources in companies that exhibit a high net profit margin. The net profit margin decreases significantly in 2017 compared to 2016 indicating poor performance.
Return on Capital Employed
ROCE is a key profitability ratio that is used by company analysis in the identification of whether the company is efficient in the utilization of capital employed in making or generating profits to the company owners. Therefore, the ratio indicates how much a potential investor will attain from one dollar investment in the company in terms of how much profit will be earned by dollar investment. The return on capital employed has decreased in 2017 compared to 2016 indicating lower return levels on capital employed.
Conclusion
The company 10K review indicates clearly that the management has employed various strategies including acquisition and introduction of new designs and products. The company sales growth and revenues is a good indicator that in the future the company will be recording high revenue level, currently, the company is recording high gross profit margin but is not yet to become profitable. Therefore, potential investors should only consider investing in the long term but not in the short run. The profitability and liquidity ratios indicate that the company is still struggling to remain profitable and liquid.
Reference
Tesla, Inc. (2017). Annual Report on Form 10-K for the Year Ended December 31, 2017
