Once the darling of the last decade, Tesla’s (TSLA) balance sheet and capital structure have been a cause for concern for analysts and investors. Take a look at the company's financials, and you may think the company is 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. But that price is a simple matter of history. As of August 2019, the stock was hovering just past the $200-mark, closing at $213.10 on Aug. 27, 2019. The stock's track record still has most investors wondering if it will climb higher and reach the lofty highs it once had. The answer may lie in the stock's underlying capital structure.

Key Takeaways

  • Investors should consider Tesla’s debt story and industry background in the automotive industry.
  • Tesla has to fuel its expansion by leveraging debt.
  • The only way to fund this position is through ever-increasing share-equity or long-term debt raises.
  • Both scenarios result in diluting the earnings per share value or saddling the company with debt to equity that will continue to outpace its major competitors.

Tesla's Beginnings

The popularity of the Tesla success story is widely known. Tesla did what the Big Three could not: Produce a quality electric vehicle, that is in huge demand.

The startup electric-vehicle car company did what no other manufacturer in the world could do, to produce an all-electric vehicle in huge demand.

The company was founded in 2003, but didn't release its first car—the Roadster—until five years later. In 2012, the company moved from the Roadster to its Model S sedan. That same year, Tesla also made charging stations in both the U.S. and Europe, allowing Tesla owners to charge their vehicles for free. As of 2019, the company has several models on the market including the Model S: the Model 3, the Model X, with the Model Y set for release in 2020.

Tesla was founded by two engineers, Martin Eberhard and Marc Tarpenning who named the company Tesla Motors. It caught the attention of PayPal cofounder Elon Musk, who invested millions during the early rounds of funding. Musk eventually became chairman of the company before taking on the role of chief executive officer (CEO).

Capital Structure Debt

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 (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. The company's debt ballooned, exploding from $598 million in 2013 to nearly $10 billion in 2018. The company ended 2018 with a total of $3.7 billion in cash and cash equivalents. As of the end of 2018, its debt-to-equity (D/E) ratio was 1.63%, which is lower than the industry average. However, the market valuation of Tesla is overvalued, providing a lower ratio than other well-established automakers.

Shareholder Equity

Institutional investors hold 63% of Tesla's shares. At the end of 2018, the company had a capital surplus of $10.2 billion, with just over $4.9 billion in stockholder equity. Tesla's market cap, as of August 2019, is $38.817 billion. 

To fund the expansion of manufacturing facilities for its cars and batteries, the company is not expecting to make a big profit until 2020. Tesla's return on equity (ROE) is -9.54%, return on assets (ROA) is 0.70% and profit margin is -2.64%, though its quarterly revenue growth year over year (YOY) as of 2018 was 58.70%.

Debt and More Debt

For investors looking for rock-solid financials in a company, Tesla may not be the one. To fuel its expansion, In April 2019, Tesla said it planned to raise another $2 billion through long-term debt or equity share positions over the next few years. With almost $9.4 billion in purely 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.