Welcome to this cash flow statement tutorial showing how to read a cash flow statement
using the 2016 through 2018 actual numbers from Tesla.
A disclaimer before we begin: I don’t hold any position in shares in Tesla, nor do I
own a Tesla car.
Let’s start with the purpose of the cash flow statement.
What a company shows by publishing a cash flow statement in an annual report, is how
they got from the cash balance on January 1st (on the previous balance sheet), to the
cash balance on December 31st (the latest balance sheet).
The increase or decrease between the January 1st and December 31st cash balance is called
cash flow.
It consists of three categories: Cash From Operating Activities (basically the incoming
cash from customers minus outgoing payments to employees, suppliers and governments),
Cash From Investing Activities (mostly outflows due to capital expenditures and acquisitions),
Cash From Financing Activities (cash inflows or cash outflows due to changes in borrowings
and issuing equity), or terms with slight variations on that wording.
Let’s first define the term “cash balance” before we go into cash flow.
In Tesla’s 2018 financial statements, cash balance is the sum of cash, cash equivalents
and restricted cash.
The total of these items was $4.3 billion dollars per December 31st 2018.
What are the “cash equivalents” in the line “cash and cash equivalents”?
Cash equivalents are all highly liquid investments with an original maturity of three months
or less at the date of purchase.
For Tesla, mostly money market funds.
Cash and cash equivalents were $3.7 billion at year end 2018,
or 86% of the total balance shown here.
The remaining $600 million dollars is restricted cash.
Restricted cash is cash balances restricted as to withdrawal or use.
Mostly cash used as collateral for certain business transactions.
For reporting purposes, there is a split between current and non-current restricted cash.
How did this total cash balance develop over the past three years?
Time to look at the relationship between cash balance and cash flow from the start of 2016
to the end of 2018.
We will put 2016 on the right, and 2018 on the left.
Tesla started 2016 with $1.2 billion in cash, and ended the year with $3.8 billion.
That cash balance further increased to $4 billion by the end of 2017, and $4.3 billion
by the end of 2018.
What were the characteristics of the cash flow in each of the years, and the “themes”
we can identify from these numbers.
For each of the three years, the ending cash balance is higher than the opening cash balance,
but the extent and driver for the increase varies.
2016 had a slight cash outflow from operating activities, $1.1 billion outflow from investing
activities, and a significant cash raising of $3.8 billion in financing activities.
2017 had another slight outflow from operating activities, record $4.2 billion of cash outflow
from investing activities, and record $4.4 billion in cash raising in financing activities.
2018 was the first year with significant cash inflow from operating activities of $2.1 billion,
a further $2.3 billion of cash outflow from investing activities, and a shrinking of the
cash inflow from financing activities to $500 million.
We could call 2016 the year of “pre-funding for current and future investments”,
2017 the balancing year of investing outflows equaling cash raising inflows,
and 2018 the year where Tesla became nearly self-funding
(cash inflow from operations almost equal to the cash outflow from investing).
Let’s review each line in more detail.
How did Tesla turn from slightly negative cash outflow from operating activities in
2017 to $2.1 billion cash inflow in 2018?
This overview has line item detail.
The same total numbers, a slight cash outflow of $61 million in 2017 and the cash inflow
of $2.1 billion in 2018, are at the bottom of the page.
A big difference between 2017 and 2018 is that the net loss has shrunk from $2.2 billion
to $1.1 billion.
In general, the more profit a company generates (or the more it is able to reduce its loss),
the higher the cash flow.
Another key element in CFOA is working capital.
A fast-growing company like Tesla goes through a growth in working capital items on the assets
side of the balance sheet.
The more these assets grow, the more cash is tied up in them.
Between the three main items here, growth in accounts receivable, growth in inventories,
and growth in operating lease vehicles, Tesla had an increase (cash outflow) of these balance
sheet accounts of $1.7 billion per year.
A key difference between the years 2017 and 2018 is that working capital items on the
liabilities side of the balance sheet (most notably accounts payable and accrued liabilities)
have grown much harder in 2018 than in 2017.
The more these liabilities on the balance sheet grow, the better off the company is
in terms of cash flow for the year.
In summary, reducing the net loss and managing working capital have been the main driver
for Tesla’s cash from operating activities performance in 2018.
Cash from investing activities.
The main element of this category consists of purchases of property and equipment.
Factory construction is on track to support the expected growth in vehicle production
and deliveries.
2017 was the biggest construction year in Tesla’s history so far.
If we turn to the detailed overview of property, plant and equipment on the balance sheet,
we see the growth in gross value (before depreciation), as well as the change in composition with
a large balance in 2017 in “construction in progress” to assets placed in use in
more specific categories.
Remember that SolarCity is part of Tesla since November 2016, which explains the line “purchases
of solar energy systems” in the cash from investing activities section.
Third section of the cash flow statement: Cash From Financing Activities.
$1.7 billion cash inflow from issuing common stock (or equity) in 2016,
$400 million in 2017.
$1 billion in 2016, $3.1 billion in 2017 and $1 billion in 2018 as the net cash inflow
between proceeds and repayments of convertible and other debt.
In total, Tesla still did have a cash inflow from financing activities in 2018, but by
far not as big as the huge funding years of 2016 and 2017.
In the future, this category could start to show a net cash outflow if Tesla repays more
debt than it raises.
Back to the “themes” that we can identify from the cash flow statement.
We could call 2016 the year of “pre-funding for current and future investments”,
2017 the year of investing outflows equaling cash raising inflows,
and 2018 the year where Tesla became nearly self-funding
(cash inflow from operations almost equal to the cash outflow from investing).
If we link these three years of actual 2016 through 2018 results to the future, then the
outlook that Tesla released in January 2019 is very insightful: expected capital expenditures
of $2.5 billion in 2019, and positive free cash flow in every quarter beyond Q1 2019.
Let’s track quarter by quarter whether Tesla can deliver on this outlook, and how the cash
flow pattern will continue to change as the company grows and matures.
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