TESLA - Compare Ratios to Industry Norms

Tesla Motors Inc. also was known as Tesla is a company that is located out of Silicon Valley and mainly designs, markets, and assembles battery electric vehicles. Founded in the year 200, the company is considered to be the only electric manufacturer that also concentrates on selling zero-emission sports cars through the serial production. The company generally performs well but to determine the actual performance it is vital to perform the ratio analysis. 

Ratio Analysis 

A ratio analysis of the company is vital for investors in terms of evaluating the various aspects of the company’s financial and operating performance such as liquidity and profitability (Appendix I). 

Liquidity ratio 

The Liquidity aims at analyzing the ability of the company to pay its current liability and its long-term liabilities when they become current. The analysis of the company is by using the quick ratio, current ratio, interest coverage ratio, and debt to equity ratio. 

Quick Ratio 

The quick ratio of the company from the published financial statements is 0.37 which is less than one which means that the company has less amount of quick ratio as compared to the current liabilities. The ratio is less than that of the industry where the company is operating in which is 1.12 (Reuters, 2018) . It is not a good sign to the investors because it indicates that the company is not liquid. The low ratio is also a concern to the creditors as it can be a warning sign that they may not be paid back their money on time. 

Current Ratio 

The company’s analysis of the current ratio indicates that it has a ratio of 0.73 which means that its current assets are less than the current liabilities. The industry ratio is 1.33 which is higher than that of the company which is a concern because it means that it is not easy for the company to make the current debt payments and there is the risk that its cash flow might suffer ( Peterson, 1999) . 

Interest Coverage Ratio 

The interest coverage ratio of the company is -2.16 which means that the company cannot pay the interest that it has with its income before tax. The ratio is even lower than that of the industry which is 0.28. The low ratio is a concern to the creditors because it means that the business is not able to afford to pay the interest payments when it is required. It is also an indication of credit risk. 

Debt to Equity Ratio 

The total debt to equity ratio of the company is 297.37 while that of the industry is 72.64. It is worth noting that every industry has a different debt to equity ratio because some industry has to use more debt than equity financing and thus is vital to make the comparison. The company has a higher ratio than that of the industry which means it relies on debt financing as opposed to equity financing. It is an indication that the company is not financially stable. The business is more risky to the creditors and the investors because it uses more money to pay the debts and the interest payments. The ratio can also be an indication that investors do not want to fund the operations of the company because it is not performing well which is evident from the fact that its income before the tax cannot even cover the interest payments. The results from the liquidity ratio make it vital to analyze the profitability of the company. 

Profitability Ratios 

The analysis of the profitability ratio of the company is vital to understanding the ability of the business to generate profits from the current operations. 

Gross Margin 

The financial report indicates a gross margin ratio that is at 14.35 which is lower than that of the industry which is at 20.10. It means that the company is selling the inventory at a lower profit percentage than expected. It means that the company has a lower ability to pay its operating expenses such as rent and salaries. 

Profit margin Ratio 

The company has a net profit margin ratio of -16.42 which is lower than that of the industry which is 9.45. The ratio is an indication that the company does not do well in managing the expenses relative to the net sales. The company can improve the ratio by reducing the expenses or increasing the revenues. 

Return on Asset 

The return on asset ratio is vital in determining the effectiveness of the business in earning a good return on the investment in the assets. The return on asset of the company is -8.33 while that of the industry is 6.61 which is an indication that the company is not performing well. It means that the business is not effectively earning good returns from its investments in assets. It also means that the company is not efficient in converting the money that it has used in purchasing the assets into profits or net income. The company needs to work on strategies that will ensure that it has a positive ratio by improving its profits and using its assets efficiently. 

Return on Investment 

The return on investment or return on the capital employed by the company is -12.68 while that of the industry is 11.53. It means that losses are generated by the company for every dollar of capital that is used. It also means that the company is not using its capital as efficiently as expected by the industry that it operates in ( Palepu, 2007) . 

Return on Equity 

The return on equity of the company is -44.37 while that of the industry is 13.40 which is an indication that the company is performing below the industrial expectations. It is also an indication that the company is not efficiently using the money that it gets from the shareholders to generate profits and also to grow the company. It means that the company is not sufficiently using the investors’ investments in the business to generate its profits ( Thukaram, 2003) . The company needs to improve the ratio so that the investors can have confidence that their funds are used effectively. A higher ratio that is close to the industrial expectation is good for the company so that it can attract investors. 

Conclusion 

From the analysis of the company to determine its financial strength, profitability, and the effectiveness of the management, it is evident that the company is performing below the expectations of the industry. It can be a concern to the investors who want to invest in the company because there is a big possibility that they are not going to get a good return for their investment that is linked to the expectations of the industry. The company needs to work on its profits and also reduce the level of expenses. The business also needs to stop relying on debt financing because it is more expensive as opposed to equity financing because it uses more money to pay the principle and interest payments. What can encourage the equity investors is an improvement in the profits of the company as they will be confident that they will get goot returns for their investments. 

References 

Palepu, K. G. (2007).  Business analysis and valuation: Text only . Australia.

Peterson, P. P., & Fabozzi, F. J. (1999).  Analysis of financial statements . New Hope, Penn: Fabozzi.

Reuters. (2018, 08 05). Tesla Inc (TSLA.O). Retrieved from Reuters: https://www.reuters.com/finance/stocks/financial-highlights/TSLA.O 

Thukaram, R. M. V. (2003).  Management Accounting . New Delhi: New Age.

Appendices 

Appendix I 

FINANCIAL STRENGTH (Reuters, 2018) 

	Company	industry	sector
Quick Ratio (MRQ)	0.37	1.12	1.25
Current Ratio (MRQ)	0.73	1.33	1.54
LT Debt to Equity (MRQ)	243.53	40.42	39.15
Total Debt to Equity (MRQ)	297.37	72.64	68.27
Interest Coverage (TTM)	-2.16	0.28

PROFITABILITY RATIOS 

	Company	industry	sector
Gross Margin (TTM)	14.35	20.10	23.98
Gross Margin - 5 Yr. Avg.	21.71	20.02	23.29
Net Profit Margin (TTM)	-16.42	9.45	9.59
Net Profit Margin - 5 Yr. Avg.	-12.66	10.08	9.69

MANAGEMENT EFFECTIVENESS 

	Company	industry	sector
Return on Assets (TTM)	-8.33	6.61	6.77
Return on Assets - 5 Yr. Avg.	-6.59	7.21	7.14
Return on Investment (TTM)	-12.68	11.53	11.39
Return on Investment - 5 Yr. Avg.	-9.72	12.11	11.66
Return on Equity (TTM)	-44.37	13.40	13.54
Return on Equity - 5 Yr. Avg.	-33.04	15.69