I have been interested in buying Tesla, so I thought I would share my analysis with you. Tesla has had a rough few months; going up, going down, then back up, and then back down. But is it a good company? That’s all I care about.
This is the daily chart zoomed in from about the end of May until today. As you can see, very rough ride. They went from roughly $275 up to $380, and now back down to low $300’s. All in about 3 months.
Below is a spreadsheet that I made to help me analyze a company’s financials. It calculates compound annual growth rate, as well as a certain number of ratios that I find important. The following numbers are in $ billions. Let’s dig in…
A few red flags right from the get-go. As you can see in the top group (5 year history), Tesla has done a very poor job of creating net income. They have actually decreased 127% CAGR (compound annual growth rate), over the last 5 years. And their diluted EPS (earnings per share) has plummeted nearly the same percentage. Their free cash flow (FCF) has dropped 408% CAGR in the same time period.
As a value investor, or any investor really (except day traders), EPS is a hugely valuable number. EPS is, technically, what the share holders receive as profit. If a company cannot produce EPS, then they are virtually useless to an investor. This is, of course, a very basic definition of what investors look for. Tesla has done very poorly with this measure.
Free cash flow is the cash left over, or the cash lost, at the end of any given time period. Tesla’s free cash flow is in the red for all 5 years. This tells me one of two things:
- They are reinvesting all of their cash back into the business, while taking on debt.
- They have no idea what they are doing
The first option might not be so bad if you are a growth investor. But the second option would be a terrible thing. We wouldn’t know until we dug into their 10K (yearly financial report) and found out where the cash was going.
Moving on to a quarterly analysis.
Over the last 5 quarters, Tesla seems to be doing a little better. Their net earnings have only dropped 21% average, and EPS has only dropped 20% average per quarter. FCF is still a HUGE red flag, with an average drop of 12%.
Let’s look at some ratios.
My number one ratio; the P/E. The price to earnings multiple. Tesla’s in negative. That’s not good. You can find the P/E by dividing the price per share by EPS for the same time period. A negative P/E can only mean one thing: they had negative EPS. You can’t have a negative share price, but you can have a negative EPS. Tesla had a negative P/E last year, and for the TTM (trailing 12 months) they are negative.
The P/B is a good indicator for intrinsic value. This is the price to book ratio. Take the price and divide it by the equity, and you will get the P/B. The closer to zero the number is, the better that ratio is. Tesla’s P/B is high. They are trading at 13 times their price TTM. I would personally like to see this number below 2 or 3.
Tesla’s profit margin is negative. Last year they lost .16 cents for every dollar they made. For the TTM, they have lost .19 cents for every dollar they have made. This would indicate that they are getting worse in terms of profit margin.
Their current ratio is under one, which indicates they are unable to pay their short term debt should a problem arise and they must do so. The current ratio shows the relation between current assets and current liabilities. Current assets are easily liquidated, and current liabilities are debt that is due within a one year time frame. You can find the current ratio by dividing current assets by current liabilities. According to this measure, Tesla would be unable to pay off their current debt.
Normally, if I like a company based on their financials like what I just went through with you, I would dig in deeper. I would go to their investor relations page and I would start reading their 8K’s, 10K’s, and Proxy Statements. But, with Tesla, from my perspective and the things I look for in a company, I will not dig in any deeper at this time. Their financial numbers do not match my investing style.
Honestly, I would not normally have looked any further because of the negative P/E ratio. The P/E for me is a my first go-to. If it checks out, then I proceed. Tesla did not check out with their P/E, but I figured I would go a little further for the sake of this article.
I am a value investor. Tesla seems to be better suited for a growth investor at this time. Which is fine. And maybe if I dug in deeper to their reports I would find some stuff that I liked. However, as a value investor, these numbers just don’t add up right now.