Purchasing Stock in Tesla

Thank you for your consultation on a suitable investment opportunity for your company. The automobile industry is one of the fastest-growing industries in the United States, especially the vehicle manufacturing sector (IBIS World, 2020). The automobile industry has experienced growth over the past five years and is expected to experience revenue growth of more than 20% in the next fiscal year. Therefore, your decision to invest in this industry would be profitable in both the short-term and long-term. While this industry is projected to experience tremendous revenue growth, some of the competitors in the sector could end up being unprofitable investment opportunities.
Technological revolution is one of the factors contributing to the rapid growth and profitability of this industry. Tesla Inc. and Ford Motor Company are among the major companies operating in this industry. As shown in its annual report, Tesla has focused on manufacturing electric vehicles and self-drive cars (Tesla Inc., 2019). Ford Motor Company is a traditional automobile that is slowly venturing into the manufacturing of electric and self-drive vehicles. The company manufactures these vehicles as part of its initiative to increase its product offerings and provide stiff competition to Tesla and others. Ford seeks to rely on its brand positioning to exploit opportunities in the electric and self-drive market in order to increase its profitability and market share (Ford Motor Company, 2019).
The decision on whether to invest in Tesla or Ford Motor Company requires a comprehensive analysis of the financial performance of each of these companies. Some of the factors to consider in the analysis of the companies’ financial performance include liquidity ratios, solvency ratios, and profitability ratios. As shown in the attached financial analysis, Tesla has relatively poor liquidity ratios (current ratio, quick ratio, and cash ratio) in comparison to Ford Motor Company. Generally, liquidity ratios of at least 1.0 are generally good for businesses as anything below that is an issue of concern. Unlike Ford Motor Company (whose average liquidity is 1.05), Tesla’s liquidity ratios for 2018 and 2019 fiscal years have remained at an average of 0.80. As a result, the company’s financial condition for 2018 and 2019 fiscal years is worse than the industry average of 1.13. Tesla is performing worse than nearly 50% of companies involved in this business sector and the overall industry (Ready Ratios, 2020).
Secondly, Tesla’s solvency ratios (debt ratio, equity ratio, and debt to equity ratio) are slightly above the industry averages. The company’s debt ratio of 0.76 and debt to equity ratio of more than 3.96 exceed industry averages of 0.63 and 1.01 respectively. However, Tesla’s solvency ratios declined in the financial period ending 2019 in comparison to the period ending 2018. This implies that Tesla ended the year 2019 in a worse financial condition in comparison to the year 2018. While the decline in these ratios indicates a decline in the debt burden facing the company, Tesla is still in a worse financial position. These liquidity ratios still exceed industry averages, which indicates that the company has a huge financial burden compared to its competitors. However, Tesla’s liquidity ratios are far better than Ford’s ratios. In this regard, Tesla seemingly has a lesser debt burden compared to Ford Motor Company.
Third, Tesla’s profitability ratios for the year ending December 2019 are slightly lower than the ratios for the year ending December 2018. The slight decline in these ratios is evident in the firm’s profit margin, gross profit margin, and return on assets. Despite the decline in this financial period, Tesla has profitability ratios in comparison to Ford. Ford’s profit margins and return on assets for 2019 were below 1% while Tesla’s profitability ratios during the same period exceeded 60%. This indicates an increase in the profitability of Tesla as its ratios exceed the industry averages.
Given these factors, I recommend that you consider purchasing stock in Tesla as it has better solvency and profitability ratios compared to industry averages and major competitors like Ford Motor Company. While the firm has poor liquidity ratios compared to its competitors, the increase in these ratios for the year ending December 2019 indicates that Tesla has adequate short-term liquidity to pay for the coming liabilities (Stock Dividend Screener, 2020). Therefore, Tesla has adequate money to address the short-term solvency problem. Secondly, the increase in the company’s liquidity has positive impacts on its financial health and condition. As liquidity improves, Tesla’s financial condition will get better in the medium- and long-term. Additionally, the company’s high profitability ratios make it a suitable investment opportunity. Therefore, I believe that purchasing stock in this company is a viable and profitable investment decision.
References
Ford Motor Company. (2019). Annual Report – Form 10-K. Retrieved from U.S. Securities and Exchange Commission website: https://sec.report/Document/0000037996-20-000010/#sAC1CCB2F49095CC68D89F57AA887F4D8
IBIS World. (2020). Fastest Growing Industries in the US by Revenue Growth (%) in 2020. Retrieved November 25, 2020, from https://www.ibisworld.com/united-states/industry-trends/fastest-growing-industries/
Ready Ratios. (2020). Tesla Inc. (TSLA) Financial Analysis and Rating. Retrieved November 25, 2020, from https://www.readyratios.com/sec/TSLA_tesla-inc
Stock Dividend Screener. (2020, May 14). Analyzing Tesla Liquidity With Only 3 Ratios. Retrieved November 25, 2020, from https://stockdividendscreener.com/auto-manufacturers/tesla-current-ratio-and-working-capital-analysis/
Tesla Inc. (2019). Annual Report – Form 10-K. Retrieved November 25, 2020, from https://tesla.gcs-web.com/static-files/07bfcb70-aba1-4a27-af09-4f101678320c