Welcome to an example of how to read and analyze a balance sheet: Tesla Inc.
Where do you start if you want to gain insights from a balance sheet? Start with a high level
review of the total balance sheet. Then identify and review the large and/or unexpected items that
are bound to tell you a big part of the story. And then move on to the fine-tooth
comb approach to the other balance sheet line items, you never know what can turn up there.
So what kind of major insights about Tesla will we uncover in this balance sheet example? What will
we have found at the end of the road? First of all: Tesla’s balance sheet is nearly debt-free by
year-end 2022, as equity (shareholder capital) has grown significantly and debt has been paid down.
Second: Tesla’s balance sheet has lots of optionality.
Having $22B of cash, cash equivalents and short term investments ready to go, gives the company
the opportunity to move very fast on expanding capacity, and designing and launching new models.
Third: as capacity expands, the balance sheet expands.
I will show you what each of these balance sheet insights mean, and how I arrived at them.
The balance sheet is an overview what a company owns and what a company owes at a point in time.
What is owned (assets) is on the left, what is owed (liabilities and equity) is on the right.
When reading a balance sheet, start off at the highest level: by category.
Current assets and non-current assets on the left. Current liabilities, non-current liabilities,
and equity on the right. As the word balance sheet suggests, the total amount owned (on the left)
equals the total amount owed (on the right). Both sides of the balance sheet sum to $82.3 billion
per December 31st, 2022. Per the accounting equation: assets equal liabilities plus equity.
What are current assets? Cash and other assets
such as inventory that are expected to be converted to cash within a year.
Non-current assets? Longer-term investments such as property, plant and equipment that
cannot be converted into cash quickly, it will take more than a year for that to happen.
Current liabilities are amounts such as accounts payable that are
due to be paid to creditors within twelve months.
Non-current liabilities are amounts owed that are to be paid after the period of one year.
Equity on the balance sheet is the book value of the shareholder capital.
With the high level balance sheet information in this example, we can perform a quick check on
liquidity. Liquidity refers to both a company's ability to pay short-term bills and debts,
as well as a company's capability to sell assets quickly to raise cash.
To assess that, let’s compare current assets to current liabilities. More specifically,
let’s calculate the current ratio by dividing current assets by current liabilities.
$40.9B divided by $26.7B. Outcome: a current ratio of 1.5. A current ratio of 1.5 means that
every $ of current liabilities is covered by $1.50 of current assets against it.
With the same high level information in this balance sheet example, we can perform a quick
check on solvency. How is the right-hand side of the balance sheet built up? What is the company's
ability to meet long-term debts and continue operating into the future? In the case of Tesla,
nearly $46 billion out of the $82 billion balance sheet total is equity, shareholder capital.
Both the absolute amount of $46 billion as well as the relative percentage of 56% are impressive.
For a fast-growing company like Tesla, it is interesting to put this year’s
and last year’s balance sheet side by side, and see how it has developed.
The balance sheet totals are up 33% which equates to an increase of $20.2B,
year-over-year, on both sides. Where does most of that increase come
from? On the left-hand side, assets, primarily in current assets: up 51% or $13.8B year-over-year.
If you zoom into the line item detail of current assets on the balance sheet,
you see this being driven mainly by an increase in inventory,
and an increase in the balance of short-term investments.
On the right-hand side, the increase is mainly in equity: up 45% or $14.3B.
If you zoom into the line item detail here, you find that retained earnings (profits made
that have not been distributed to shareholders) are the main driver.
Time to zoom into the 2022 year-end balance sheet in more detail… We will review what is
in each of the balance sheet categories: current assets, non-current assets, current liabilities,
non-current liabilities, and equity. Same five categories, just a lot more detail to dig into.
In the American format of the balance sheet, assets are listed from most liquid at the top
to least liquid at the bottom. Liabilities are listed from due first to due last.
A balance sheet has a lot of different line items, so let’s identify first which ones are
the largest and/or the most interesting. On the left, property, plant and equipment, cash and cash
equivalents, and inventory, are by far the largest assets. These three make up 64% of total assets.
Digital assets are not very large in $ value, but such a rare and unusual item that we will
look into it as well. On the right, equity and accounts payable are by far the biggest:
together, they form 74% of total liabilities and equity. Additionally, debt and finance
leases are not very large, but that is exactly why they are interesting to review,
as you would expect these to be a lot bigger for a company the size of Tesla.
Let’s dive into the largest assets from top to bottom. From most liquid to least liquid. Cash
and cash equivalents, and short-term investments. The notes to the financial statements give you
more detail on these. $14B out of the $16.3B is cash. Money in the bank, ready for use.
$2.3B is cash equivalents: highly liquid investments, (mainly) money market funds, with
an original maturity of three months or less at the date of purchase. You can earn some interest
income by having money in cash equivalents, or in short-term investments, rather than in cash.
How are short term investments different from cash equivalents?
It’s all in the timing! Short-term investments are available-for-sale marketable securities
with maturities greater than three months (but less than a year) at the date of purchase.
Inventories of $12.8 billion. Is that the value of all the cars in dealerships and warehouses,
waiting to find a customer? Not really. Once again, the notes to the financial statements
provide the detail we need. $6 billion, nearly half of the total value is in raw materials.
Tesla has stocked up on raw material for the big production year ahead!
$2.4 billion is work in process. $3.5 billion is finished goods inventory.
This includes vehicles in transit to fulfill customer orders,
new vehicles available for sale, used vehicles and energy products available for sale.
Now here’s the big one on the assets side of the balance sheet: $23.5B of property,
plant and equipment, also known as fixed assets. We are looking at the net book
value here, what was spent to purchase the assets, less accumulated depreciation.
How much did Tesla originally pay for its property, plant and equipment,
and how much has been depreciated so far? Let’s find out. This $23.5B here on the balance sheet
is the same as the $23.5B here. Six categories of PP&E, totaling $32.6B of original purchase price.
Only $9B has been depreciated so far, as much of Tesla’s facilities are new to brand new.
A related item to check (as it can significantly impact profitability) is the depreciation method.
Tesla uses the simple and straightforward straight-line method,
with estimated useful lives of the various assets between 3 and 30 years.
Further down the asset side of the balance sheet, the amounts per line item might
be relatively small, but the uniqueness factor of one of the items is very high.
Have you ever seen “Digital Assets” on a company’s balance sheet? $184MM of Digital Assets?
Is that what you think it is? Yes! This is what is left of Tesla’s severely hyped purchase in early
2021 of $1.5 billion of bitcoin, only to have Tesla’s eccentric CEO suddenly reverse his opinion
on bitcoin not that much later. So why are the remaining bitcoins all the way down the balance
sheet in non-current assets? Shouldn’t they be in cash equivalents or short-term investments?
The “Summary of Significant Accounting Policies” in the notes to the financial statements clarifies
this. Tesla states: We currently account for all digital assets held as indefinite-lived
intangible assets in accordance with ASC 350. And this is done according to the “lower of
cost or market” rule: you either value the bitcoins at the price you bought them for,
or if the current market price is lower, at the current price.
If bitcoin would go up in price, you don’t realize that gain until you have sold.
Over to the right-hand side of the balance sheet, where one of the largest line items is
Accounts Payable (invoices from suppliers that the company has not paid yet). More than $15B!
This amount in Accounts Payable is almost as large as the sum of Accounts Receivable and
Inventory combined, so that part of assets and liabilities is nicely in balance.
Now here are two very impressive line items: the current and non-current portions of debt and
finance leases. What do you mean impressive? $3.1B in these two line items combined?
How is that impressive on a balance sheet total of more than $82B? Well, the $3.1B in
debt and finance leases at year-end 2022 used to be $13.4B only three years ago, in 2019.
Tesla has rapidly been paying down its debt, and is nearly debt-free by year-end 2022.
A luxurious position to be in, in an environment where interest rates are rising sharply.
And now for the big one. Equity! What is the number for the book value of the shareholder
capital on Tesla’s balance sheet per year-end 2022? That takes a little bit of calculating,
as there are two line items related to noncontrolling interests in there.
Noncontrolling interest is the portion of equity in a subsidiary not attributable, directly or
indirectly, to the parent. For Tesla, these relate to third-party interests under certain funding
arrangements to finance the costs of solar energy systems and vehicles under operating leases.
As the contractual provisions of the funds have profit-sharing arrangements,
a part of this financing is considered equity rather than debt.
So for Tesla, there are two numbers for equity that we can refer to.
Stockholders’ equity of $44.7B, and total equity including noncontrolling interests of $45.9B.
Let’s focus on that core part of stockholders’ equity.
Let’s find out how it developed from just $6.6B at year-end 2019 to $22.2B in 2020,
$30.2B in 2021, and $44.7B at year-end 2022. 2020 was a big year for Tesla in raising capital:
$12B in three rounds (February, September and December), at ever increasing share prices.
So equity in 2020 grew mostly from issuing new shares.
In 2021 and 2022, the main inflow into equity came from the profitability of the company.
As the Tesla income statement shows, $5.5B and $12.6B of net income.
As no dividends were paid, and no share buybacks occurred,
all of this net income was added to retained earnings in the equity section of the balance
sheet, making total equity a stunning $45.9B or 56% of the balance sheet total, at year-end 2022.
We have done the high level review of the balance sheet... which looks like this.
And we identified and reviewed the large and/or unexpected items… which looks like this.
Now we move on to the fine-tooth comb approach to the other balance sheet line
items. Don’t underestimate the nuggets of insight you might come across here!
Accounts receivable is usually defined as invoices sent to clients that have not been paid yet.
So is Tesla waiting for consumers to pay them $3B for cars already delivered? Not quite. Consumers
wanting to buy a Tesla are actually on the other side of the balance sheet, in customer deposits,
as you have to pay upfront to even get into the queue! What’s in accounts receivable on the Tesla
balance sheet might be slightly different from what you expected. It consists of:
amounts related to receivables from financial institutions and leasing companies,
amounts due for sales of energy generation and storage products,
amounts due related to sales of regulatory credits to other automotive manufacturers…
you heard that right! Tesla makes good money selling regulatory credits (which
it doesn’t need as it produces “emission-free” vehicles) to “traditional” car manufacturers.
Most of those sales of regulatory credits happen right at the end of the quarter,
so it’s only logical that the collection of the cash might be outstanding.
The fourth element of accounts receivable at Tesla is government rebates already passed through to
customers. These can take up to a year or more to be collected. If more than a year, they are booked
in “Other non-current assets”. If less than a year, then they are in accounts receivable.
Customer deposits primarily consist of cash payments from customers at the
time they place an order or reservation for a vehicle or an energy product and
any additional payments up to the point of delivery or the completion of installation.
In non-current assets, the first two line items are operating lease vehicles,
and solar energy systems. Yes, Tesla is more than just a car company.
Vehicles that are leased as part of the direct vehicle leasing program are classified as
operating lease vehicles. Tesla is also the lessor of solar energy systems. On the balance sheet,
both the lease vehicles as well as the solar energy system leases are recorded at net book
value: the cost to produce them, minus what has already been depreciated due to their usage.
“Accrued liabilities and other” of $7.1B is to a certain extent closely related to Accounts
Payable. Here’s the detail from the notes to the financial statements. The first line item, accrued
purchases, reflects receipts of goods and services for which Tesla has not yet been invoiced.
That will turn into Accounts Payable as soon as the invoices do arrive.
Deferred revenue is found both in current liabilities as well as non-current liabilities,
depending on whether it will be realized within the next year or later.
Deferred revenue is a liability representing the obligation to deliver goods or perform
services in the future for which billing has already occurred and/or cash has been received.
Whereas customer deposits are mostly related to advance payments for vehicles or energy systems,
deferred revenue mostly relates to recognizing the revenue from software over its useful life.
This line item over here, commitments and contingencies, has no number against it,
but the narrative in note 15 is well worth reading. It includes a description of pending
legal proceedings, Tesla’s position on them, and the potentially very significant impact
that these legal proceedings might have on the future financial statements of the company.
Remember: a balance sheet is always a picture at a point in time,
who knows what it will look like next year, or a few years from now!