Tesla Stock: Capital Structure Analysis (TSLA)

Once the darling of the last decade, Tesla Motors Inc.’s (NASDAQ: TSLA) balance sheet and capital structure are showing signs that the company may be in serious trouble. In the spring of 2013, Tesla’s stock share price shot into the stratosphere from a range of $20 to $30 over the previous few years to a high of $190.90 that year. In 2015, the share price kept climbing to $280.02. In April 2016, the share price had been hovering around $250, and in December 2017 has climbed even higher to around $340. Still, most investors want to know if it will climb higher. The answer may lie in the stock's underlying capital structure.

The popularity of the Tesla success story is widely known. A startup electric-vehicle car company did what no other major auto manufacturer in the world could do, which was produce a quality, high-performance, all-electric vehicle that is in huge demand.

As an investor, you should first consider Tesla’s debt story and industry background in the automotive industry. Since 1800, only one auto manufacturer in the United States has never gone bankrupt, Ford Motor Company (NYSE: F), yet even it was on the verge of bankruptcy in 2008. Auto manufacturers require huge amounts of capital to invest into the actual manufacturing process. While the Big Three automakers have established factories, Tesla has to fuel its expansion by leveraging debt. As of 2016, this debt has ballooned in the last three years, exploding from $598 million in 2013 to nearly $6 billion in 2017. The company is also burning through its cash reserves. It spent about $1 billion per quarter in 2017, or about $8,000 per minute. At the end of 2017, its debt-to-equity (D/E) ratio was 2.12%, which is lower than the industry average. However, the market valuation of Tesla is overvalued, providing a lower ratio than other well-established automakers.

Tesla has been a very popular stock among investors, partially because of its success story. It did what the Big Three could not: produce a quality electric vehicle. Institutional investors hold 60% of Tesla's shares. At the end of 2016, the company had a capital surplus of $7.7 billion, with just over $4.7 billion in stockholder equity. Tesla's market cap, as of December 2017, is $56.42 billion. To fund the expansion of manufacturing facilities for its cars and batteries, the company is not expecting to make a profit until 2020. Tesla's return on equity (ROE) is negative 38%, return on assets (ROA) is negative 3.79% and profit margin is negative 13.09%, though its quarterly revenue growth year over year (YOY) as of 2017 was 29.09%.

For investors looking for rock-solid financials in a company, Tesla may not be the one. To fuel its expansion, Tesla is expected to raise another $5 billion through long-term debt or equity share positions over the next few years. With almost $4 billion in long-term debt already on the books, not including short-term debt, the company is in a negative cash flow situation and will be for the foreseeable future. The only way to fund this position is through ever-increasing share-equity or long-term debt raises. These scenarios result in either diluting the earnings per share (EPS) value for stockholders or saddling the company with debt to equity in a ratio that will continue to outpace its major competitors. The capital structure of Tesla appears to be in trouble for investors. It must continue to grow its top-line revenue significantly to be able to provide confidence to its investors, lenders and shareholders, while at the same time increasing its return on equity, return on assets and profit margins.