Financial Research ReportThe company that I have selected to study is Tesla Motors. The reason for studying this company is that my investment advice practice has received a lot of calls about this company in particular. This is a company that has generated a tremendous amount of "bullish buzz" this year (Brumley, 2015). Opinions among the analyst community are decidedly mixed about Tesla stock. Some analysts view the stock from the lens of an automobile company, where Tesla is a niche player struggling to gain a foothold in a highly-competitive industry, or view it through the traditional lenses of profits and cash flow, and determine that Tesla stock is grossly overpriced (The Street.com, 2015).

Yet, others are bullish on the company because they see it as having disruptive technology (Boyadjis, Rassweller & Brinley, 2014). The CEO, Elon Musk, is a rock star CEO capable not only of generating a lot of hype for his companies, but also capable of acquiring financing for his companies, something that can take Tesla to a point where it actually generates positive operating cash flow. The bulls see a $9 trillion global automobile market, envision a post-carbon future, and see Tesla has owning a substantial market share in the post-carbon auto market, something that would position the company as substantially undervalued today. The bears counter that Tesla is not actually that disruptive, again arguing against its present valuation (HBR, 2015). But for this debate, my customers want to talk about the stock, and that is why it makes for such an interesting case study.

Investor Profile

Not all investments are suitable for all investors. One of the important tasks that a financial manager must do is to perform a risk assessment on a client prior to making investment recommendations. Typically, the breakdown of investor risk tolerance characteristics begins with demographic factors such as age, gender, income, and education. There are logical reasons for this. People have different financial needs at different stages of their lives, and such needs are typically reflected in their risk tolerance levels. For example, someone who is in their thirties and just starting a family is going to be motivated by a time horizon that begins with buying a home (short-term or medium-term) to longer-term objectives such as college and retirement. Someone who is in early retirement has a much different risk tolerance, because they no longer have any earning capacity, and need to ensure that they have enough money on which to survive. The very old, on the other hand, may well have their investment money earmarked for their heirs, which again changes the risk profile of the account.

There is also empirical evidence to support the idea that people's risk preferences vary by several different demographic characteristics. The most significant were gender, marital status, occupational status, income, race and education. It was found that age is not actually a significant factor in the risk tolerance of the investor, contrary to common belief (Grable, no date). The financial manager can take age into account on his or her own, however, and typically will separate out risk tolerance from the other demographic factors. . Age matters where it affects the time horizon of the investments.

In general, equity investments are riskier than debt investments, among the common classes. Equity investments fluctuate both on their own (firm-specific risk) and with the market (market risk). Thus, most companies see the value of their shares fall when the market falls, though there are always exceptions. The market risk is a beta of 1.0, so the further a firm's stock is from 1.0, the greater the deviation between the movement of that firm's stock and the general market. Firms with very low betas are very stable, those with high betas are very unstable. One of the reasons why Tesla receives so much press is not just the buzz surrounding the company but the volatility of its stock. The financial media caters more than anything to the active trader, and active traders love big name volatile stocks, so the financial media talks about Tesla a lot in part because of its volatility. The current beta of Tesla stock is 0.64, which indicates that this company tends to move in the same direction as the market, but weakly. This actually makes the stock useful in a portfolio as a means of countering other stocks that move more in line with the broad market. The low beta for Tesla basically means that its movements are not all that well-correlated with...

This philosophy applies even more to Tesla Motors, when one examines the company's operations. Tesla is not profitable, and it has a high burn rate. The company does not at present have a demand problem, but rather a supply problem It cannot built capacity fast enough, but is determined to keep production in-house. This is creating a cash flow problem for the company as it is not making enough money to fuel its expansion. Normally, a company with a beta where Tesla's is tends to be a fairly stable company (i.e. Walmart), but Tesla is not even projecting a profit for several years. There is no question, even among the company's bulls, that if Tesla is to become profitable and to realize its market potential, such things will not happen for several years. Thus, the time horizon for Tesla shares is much longer than the beta would indicate, but financial analysis bears this out. The only sort of investor who should be interested in Tesla right now is someone with a high risk tolerance and a very long time horizon -- the company could just as well be the next Blackberry as the next Apple.
Moreover, Tesla should be part of a broader portfolio. The client that will own Tesla will include it as part of a diversified portfolio of equities. The target client is probably male, has a good education and earns well, as these are all characteristics associated with risk-taking. Tesla will be a high-growth stock, and one of the riskier ones in a balanced portfolio.

Financial Ratios

A good way to investigate the health of a company is via its financial ratios. There are several different categories of ratios, each based on the company's financial statements. All publicly-traded companies need to publish financial statements according to a consistent reporting format, and using generally accepted accounting principles (GAAP). The purpose of the financial statements is to accurately reflect the financial condition of the company, and to provide a basis for comparability between companies, for a wide range of stakeholders. In particular, comparability is an issue with Tesla. Many bearish analysts evaluate Tesla strictly against other car companies, where bullish analysts tend to accept the proposition that Tesla is in a completely different situation from most of those, and that the operational differences between Tesla and other automakers makes comparability absurd -- not the least of which is that most automakers are mature, slow-growing entities while Tesla is not.

There are several categories of financial ratios that can be calculated and these categories inform the analyst about different aspects of the company's financial condition. The basic categories of financial ratios are the liquidity ratios, solvency ratios, efficiency ratios, market ratios and the profitability ratios (Loth, 2015). The liquidity ratios evaluate the company's ability to meet its financial obligations for the coming year. Some common liquidity ratios are the current ratio (current assets / current liabilities), the quick ratio and the cash ratio. The quick ratio is the value of current assets less inventories over current liabilities, and the cash ratio is cash over current liabilities. The current ratio makes the most sense for Tesla, because it can reasonably expect to move all of its outstanding inventories -- the company's demand exceeds its production capacity. Thus, all categories of current assets can be used to evaluate its liquidity. The current ratios for the past three years for Tesla are:

2012

2013

2014

Current Assets

Current Liabilities

Current Ratio

0.97

1.87

1.52

These figures tell us two things. First, Tesla is growing rapidly, as the growth in both the current assets and current liabilities has been substantial over the past three years. Further, the company is liquid. A current ratio of 1.52 is perfectly reasonable for any company, and indicates general good liquidity.

The solvency ratios evaluate the long-term health of the company. This is important because there can sometimes be a significant difference between the short-term and long-term health of the company. The short-term is mostly about cash, but in the long run it is about capital structure, and the balance between equity and debt as sources of financing. The cash flow statement indicates that Tesla had…