Tesla – Financing Growth Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Tesla – Financing Growth Case Study Analysis

Asset Turnover Ratio:

Asset turnover ratio has declined from 2013 to 2015, which indicates that Tesla Motors is not making sufficient sales as compared to the assets they have. In other words, Tesla Motor is utilizing more assets to generate $1 sale.

Debt-to-Equity Ratio:

The debt to equity ratio has been increasing from 2013 to 2015 indicating the relative proportion of equity and debt of shareholders used to finance the assets of company. The abnormal fluctuation in the debt and equity of shareholders or high debt to equity ratio indicates that the company had been aggressive in financing its growth with debt.

Also, the aggressive leveraging practices are often related with high risk levels which will increase the beta of the company. For investors, the capital structure of Tesla seems to be in trouble, it should continue to grow its top-line revenue in order to provide enough confidence to its shareholders, investors and lenders, while at the same time increasing its return on assets, return on equity and profit margins.

Net Working Capital:

The net working capital has not been stable and fluctuating from 2013 to 2015, showing that the level of inventory has increased and reached $1277838; the restricted cash and marketable securities have also increased and reached $22628. Additionally, the prepared expenses have also increased in 2015. For current liabilities, the increase in account payable, differed revenues, customer deposits and accrued liabilities have increased the current liabilities. The negative net working capital in 2015 shows that the liabilities have exceeded over assets, it can also depicts the company would funds its growth in sales through borrowing.

Dividend Yield:

The company dividend yield was estimated to be 0% in the year 2013,2014 and 2015 respectively as the company’s policy comprises of not paying any cash dividends in the foreseeable future. The determination of future dividend will be based on various factors which includes discretion of their board of directors, laws the firm has to comply with, financial condition, operational performance, capital requirements, the general business conditions and various other factors.

The 0% dividend yield appears to be a warning sign that a company is facing adverse economic conditions or financial hardships and is the main factor of investor’s low confidence in the business which will affect future share price of the company. (See Appendix -4)

Company Comparison Analysis

In 2016, the major competitors of the organization which includes Daimler, BMW and Volkswagen had a share price of $76.45 and $58.68 which is lower than the current share price of $211.17 but greater the estimated share price of $25.12 but lower than the share price predicted by the three analysts. Moreover, the competitors had a P/E ratio of 7.1 times and 7.9 times respectively which is higher as compared to the P/E ratio of Tesla as the company had suffered a loss of $888 million in the year 2015.

On the other hand, from qualitative perspectives, the major competitor of the organization in the U.S market appears to be BMW, Daimler and Volkswagen as together these companies had acquired a 98% share in the U.S market. However, Tesla appears to be the market leader in battery-electric car sales in the United States.

The organization also faces fierce competition from German Automobile manufacturer Volkswagen. In 2019, the organization’s market capitalization exceeded the market capitalization of Volkswagen and BMW. (Crider, 2020) Moreover, the organization overtook Volkswagen as the world’s second largest automobile manufacturer. The organization major competitors includes Toyota, the world’s leading player in electric vehicle market, Tom Ford, Daimler, a German based automobile manufacturer and Chrysler.

Competitive Advantage

Imaginative Lithium Ion Batteries:

Not quite the same as the batteries that have been utilized by the producers of vehicles for such a long time, Tesla has changed the pattern in the battery utilized in autos. The most well-known sort of battery for example utilized in PCs and other battery-powered things has been utilized by Tesla as a key change in its vehicle. The Lithium particle battery utilized were provided to Tesla by Panasonic yet were changed as for the necessities of vehicle wiping out the utilization of petroleum, diesel or gas.

Enormous Network of Supercharge Stations:

As Tesla has produced vehicles with battery-powered batteries, this has essentially taking out the need of petroleum or diesel. It serves a key source to secure the earth also. It has been accounted for by the Energy division that by 2013 there would more than 6,000 charging stations for open use. Thus, to defeat the issue of charging, Tesla has expressed to set up stations for supplanting the battery with the charged one in only 90 seconds.

Direct Sale to Customers:

Pretty much every association in the vehicle business sells its vehicle through a vendor procedure. In contrast to different firms in the association, Tesla deals and administrations are free of vendor. As Tesla has assembled its own stores for the offer of its items. These stores are claimed by Tesla itself. The representatives procured as salesman on compensation rather than commission per deal. In this manner, no providers or retailers are associated with the offer of Tesla's vehicle. (MOONIS AHMED, 2015)

Passageway Strategy of Tesla:

All through its excursion from its start till now, the fundamental focal point of Tesla was to make a moderate vehicle yet with imaginative innovation and inventive thoughts. The primary creation vehicle by Tesla – Roadster was made with a similar core interest. The whole assembling of autos depended on the possibility of its utilization of vehicle battery that was a typical battery – Lithium Ion for example other than batteries being utilized in the vehicle fabricating. This was the key that brought about the separating vehicle from others as different autos need oils for running while vehicles made by Tesla engines are battery-powered for environmental conditions just as cost-sparing.

Recommendation

It is recommended to the firm to use only the Discounted Cash Flow valuation method as the method is extremely detailed and requires a lot of logical assumptions to be made which increase the reliability of the share price and equity value determined under the model. Moreover, it incorporates the future expectations about the business, allows for sensitivity analysis and does not require comparable companies which make the valuation of share price reliable, fair, less time consuming and costly.

Alternatively, the share price of the organization’s shares can also be determined using forward looking P/E multiple which uses the forecasted earnings for the next 12w months of the organization’s fiscal year. The forward P/E ratio appears to be more relevant and fair as compared to trailing i.e. historical P/E ratio. Moreover, the forward P/Multiple approach is considered to be an appropriate and reliable measure of estimating the intrinsic value for the organizations shares.

It is estimated that the earnings in 2017 will be $1451, 371 which is calculated using various growth rates and revenue assumptions specified in the DCF and Sensitivity Analysis Sheet of Excel file. As a result of using the forecasted earnings and the current share price of $211.74, the forward P/E ratio is 2.92 ties which appears to be significantly, low as compared to current P/E multiples of comparable companies in the industry. The share estimated as a result of using this approach is $20.22 which is close to the share price estimated using only DCF method i.e. share price of $16. The share price under the two method sis calculated assuming the organization has 20000 outstanding or common shares. (See Appendix -3)

Conclusion

Based on the share price determined using multiple approaches, it is believed that DCF and forward looking P/E multiple approaches demonstrate the true picture and fair picture of the organization as it is evaluated from the results of financial analysis performed that the firm is experiencing financial difficulties as evident by the declining current, quick ratio, lower P/E ratio and consecutive net losses. Moreover, the various valuation approaches used by the analyzed appeared to be subjective and uncertain.............................

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