Tesla's finances are in dire straits, with skeptics claiming the company is bankrupt

Tesla's financial situation is so dire that its current cash position is struggling to cover operating costs and liabilities. The failure of the financing and the recent tightening of cash spending indicate that the company is facing a cash flow crisis.

Tesla has long been ignoring outside doubts and is committed to the popularization of electric vehicles to promote innovation and development in the automotive industry. For Tesla's supporters and shareholders, Elon Musk is a respectable dreamer. Tesla's commitment to innovation is not only reflected in the huge investment in the automotive sector, but also in the acquisition of Solar City and other projects.

Tesla is a "storytelling" stock that keeps telling investors about Tesla's story of subverting and redefining the auto industry. However, this story conceals the fact that as Tesla borrowed heavily, its balance sheet gradually deteriorated. I think Tesla has reached a critical point now, and the company has entered the liquidity crisis stage from the debt repayment crisis stage.

Status quo

Even in the most fanatical bull market, it is difficult to cover the fact that Tesla’s balance sheet is “very weak”. In November last year, the doubters in Montana suggested that Tesla had gone bankrupt. I also share the same feeling. I think Tesla has now been rose from the problem of insufficient solvency to serious liquidity problems. By definition, solvency usually refers to the company's ability to repay long-term debt, with greater room for manoeuvre in time; liquidity refers to the company's ability to repay its short-term debt, usually by such ratios, current ratios, quick ratios, etc. measure.

According to the latest first quarter report of 2018, Tesla's current assets and liabilities are shown in the following chart, reflecting its liquidity level. In the figure, I excluded the inventory factor, because in the event of liquidity problems, unfinished inventory, especially for unique automotive products, is difficult to pay for short-term debt. During the bankruptcy, inventory may be realized, but given the current Model3 capacity ramp, inventory cannot provide any short-term cash support for Tesla.

In terms of assets, the company has $2.7 billion in cash, which seems to be a healthy fund, but we realize that the company spent $1.1 billion on its operations and capital expenditures in the first quarter. At the same time, it can be seen from a quarterly report that nearly $900 million in cash is held overseas. But most of Tesla's costs come from manufacturing and sales in the United States, and the amount of cash available to meet domestic demand is only $1.8 billion.

In order to create additional liquidity, companies can usually do some work on working capital, such as delaying payment of suppliers and early recovery of accounts receivable. Tesla used these methods in the fourth quarter of last year to increase the amount of cash at the end of the year, making the liquidity of the first quarter of 2018 "return to its original state."

Based on the above balance sheet, the adjusted quick ratio is only 0.45, which means that they can only liquidate the current debt at a price of 0.45 US dollars, and will drop to 0.34 after the foreign reserve. Tesla's current ratio is 0.74, and the asset position is far below the level needed to repay short-term debt. Both sides are not optimistic about Tesla's liquidity.

Tesla Cash is relying on future customer deposits: In theory, these payments are owed until the customer receives the product that has already been paid. In the insolvency process, these high-paying debts will be repaid, and these paid customers are likely to be unlucky. Tesla's reluctance to provide a breakdown of the deposits, together with a series of long refunds in the 2017 Model3 release, indicates that Tesla is using these deposits as a source of short-term financing, not for the future produce.

In terms of accounts payable and accrued debt, Tesla and Musk have taken some measures to control the cost, stipulating that all amounts totaling more than $1 million will be approved in person by Musk. Tesla has taken a very strong approach to its customers, requiring all subscribers to receive personal guarantees from Tesla employees.

Both will control costs, but it is unlikely to boost production, as recurring costs are subject to approval, and Musk's broad interest may result in discounted implementation. At the same time, these two measures are not particularly attractive to employees and will also affect incentives. This is not true value creation, although these initiatives can educate employees about the importance of capital in the short term.

Tesla's accounts payable continues to grow, and due to the existence of a purchase commitment, the actual amount may be greater than what is shown on its balance sheet. When a liability occurs, such costs should be reflected on its balance sheet. A recent analysis report pointed out that there may be $1.4 billion that will be paid due to purchase commitments, which has not yet been reflected on the balance sheet. However, Tesla is a publicly traded company, coupled with media reports, suppliers and creditors are well aware of their lack of cash. Suppliers who are worried about not being paid or may be able to replace Tesla's “back pot” are unlikely to support their future business.

Crisis

Industry website Jalopnik said in a report that a lawsuit revealed that Tesla employees did not properly receive overtime pay, and the company used debit cards instead of paychecks to pay compensation, which may pass on some of the company’s expenses staff. In any case, for a financially stable company, this is an irregular behavior and a sign of the difficulty of cash flow. Tesla’s dismissal or layoffs at the expense of employee relations is another sign that the company is trying to save money.

At present, the key to whether Tesla can survive the liquidity crisis is whether it can get financing smoothly. I am worried that Tesla may fail to raise funds in the future. Its share price has risen to a high of $380, which should be a good time for Tesla to raise funds in the capital market by diluting shareholder equity.

There may be several reasons why they have not done so. The market reacted coldly to the bonds issued last time. In August 2017, Tesla successfully issued a $1.8 billion bond with a coupon rate of 5.3%, which expires in 2025. The reaction to “coldness” is only a conservative statement, as the face value of bonds has fallen from 100 to 86, which means the market is skeptical.

The current market rate of return has exceeded 7%, and any new debt is unbearable for Tesla, especially in the context of rising interest rates. According to a quarterly report, Tesla has mortgaged the equipment at the Fremont plant, but I believe that the liquidity crisis makes it unlikely that Tesla debt will be raised again, as new debts are likely to be repaid in order of priority current debt. This is unlikely to happen.

It’s a lack of support from investment banks. As can be seen from the first quarter of 2018, the relationship between Tesla and its CEO Elon Musk is breaking. Musk refuted several analysts' questions about the financial situation, and even Adam Jonas, an analyst who has been optimistic about Tesla, denied Tesla's demand for financing.

Often, companies will want to maintain good relationships with potential underwriters, especially if cash requirements are so clear. This relationship is obviously not as harmonious as it used to be.

I believe that Tesla has been told that they need to prove that they have the ability to continue to make a profit, rather than just a short-term profit, as they did before the issuance of bonds in the third quarter of 2016. Otherwise, Musk will not think it necessary to express through Twitter that Tesla will achieve positive profit and cash flow in 2018.

In fact, Musk mentioned the "two" quarters instead of the "one" quarter, which makes me believe that the current capital market has a "do it for me" mentality for Tesla - in my modelY, electric trucks, etc. Before investing more money, let me see that Tesla can make a profit with the funds raised in the previous period.

There are potential regulatory risks. The reporter of the investigation found signs of a secret investigation by the US Securities and Exchange Commission (SEC) on Tesla. The risk seems to have been confirmed by the crazy days and nights blog, confirming that a large SEC investigation is underway.

Tesla did not disclose any current investigations, but they have also flashed their words in this regard. If such an investigation is underway, it will definitely have a negative impact on Tesla's financing capabilities. This can also explain the recent departures in Tesla's finance department.

Gamble

In "The Sun Also Rises," Ernest Hemingway used the concept of "slow and then accelerate" in bankruptcy for the first time. I think this works well for a company facing a debt repayment crisis and a cash flow crisis.

At present, Tesla's cash flow situation seems very tight, its domestic cash is only 1.8 billion US dollars, even the current business payables are not enough, not to mention debt or capital expenditure. The harsh measures taken by Tesla in its operations also indicate that the cash crisis has had a huge impact on the company. Musk's increasingly inexplicable performance on Twitter may also be a sign of pressure.

This liquidity crisis did not happen overnight, but slowly, and Tesla used the funds used to invest in new projects to fill operating losses. Despite trying to improve by multiple means, the company has not been able to achieve its operational goals. Unfortunately, the patience of investors and the market for sustained losses is limited.

This time will probably be the end.

For many years, Musk has been refuting doubts about his ability to pay debts. He has a group of loyal customers and investors who will help him get out of trouble by providing funding. Long-term holding of Tesla stocks now seems to be a gamble, depending on whether Tesla can survive to the day of achieving its grand vision.

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