This paper analyses the financial performance of Tesla Motors and Solar City companies by focusing on their efficiency, leverage, and liquidity ratios. This analysis will determine the reason for increased investor attraction towards the two companies. The ratios are calculated using the 2012 annual financial statements.
Key words: creditors, bills, purchases.
Financial Statement Analysis of Tesla and Solar City
Efficiency Ratios: Accounts Receivable Turnover Ratio
This ratio measures the period, through which the creditors pay their dues to the organization. A greater number of times indicate that there is better management of credit (Magoon, 2008).
Formula: total sales/accounts receivable
Tesla Motors $413.3/$26.8 = 15.42
Solar City $128.66/$25.15 = 5.12
Analysis: For this case, Tesla Motors showcases a higher number of days it takes to collect debt from creditors in comparison to Solar City. This means that unlike Tesla Motors, Solar City Company has devised the effective ways of collecting debt, so that the funds are made available to meet short-term obligations; thus, conduct short-term investments.
Average Collection Period
This ratio shows the average number of days that the organization will take to collect credit sales. It shows for how long the business money is tied up with the credit customers. A lesser period is acceptable (Magoon, 2008).
Tesla Motors 365/15.42 = 23.67
Solar City 365/5.12 = 72.35
Analysis: For this case, Tesla Motors, unlike its counterpart; Solar City showcases a favorable average length of time it takes to collect money for goods sold on credit. This means that Tesla Motors has, in a long period of time, devised the efficient ways of collecting the debts owed.
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Accounts Payable Turnover Ratio
This ratio shows the quickness, with which the business pays its bills (Magoon, 2008).
Formula: cost of sales/ accounts payable
Tesla Motors $383.2/$303.4 = 1.3
Solar City $77.78/62.99 = 1.2
Analysis: For this case, both of these businesses showcase a favorable accounts payable turnover ratio. This means that the two businesses are conducting efficient businesses that are able to make money needed for paying the bills within a short period. In other words, it means that these businesses are able to make enough profits that are used in flattening bills in an effective manner.
Inventory Turnover Ratio
This ratio shows the number of times the inventory turns over in a year. High turnover indicates fast moving stock; hence, high demand for products (Magoon, 2008).
Formula: Average inventory = (opening +closing inventory)/2
Tesla Motors $383.2/88 = 4.4
Solar City $77.78/269 = 0.29
Analysis: Both of these businesses showcase a ratio that is favorable in comparison to the industry average. This means that the two businesses are not holding any excessive stock and they have devised effective ways of selling stock at a much faster pace. This could have been achieved through lowering of prices for their respective goods.
Leverage Ratios: Debt-To-Total Assets Ratio
This shows the percentage of total funds provided by the creditors (Leach, 2010).
Formula: total debts/ total assets
Tesla Motors $989.5/$1114.2 = 0.89
Solar City $760.03/$1360 = 0.56
Analysis: For both of these two companies, the ratio is much favorable in comparison to the industry average. This means that the two businesses have devised a way for maintaining favorable ratios for the funds provided by the creditors.
This shows the percentage of funds that are provided by the creditors in comparison to the owners (Leach, 2010).
Formula: total debts/stakeholder’s equity
Tesla Motors $989.5/$124.7 = 7.9
Solar City $760.03/$214.32 = 3.54
For both of these companies, the debt-to-equity ratio portrays a favorable financial position, since a balance between capital provided by both creditors and owners have been synchronized in an effective way. Thus, the companies don’t have to not worry about liquidity position and matters related to ownership.
Liquidity Ratios: Current Ratio
This ratio measures the extent, to which the short-term obligations of a firm can be met. It should be noted that a higher current ratio is preferred (Bull, 2008).
Formula = current assets/current liabilities
Tesla Motors $524.8/$85.6 = 6.13
Solar City $524.8/$85.6 = 6.13
Analysis: The current ratio for Tesla Motors is higher, in comparison to that of Solar City. This means that the company is able to meet its short-term obligations within a shorter period of time.
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This ratio is a measure of the extent, to which the firm can still meet its short term obligations when they fall due without the sale of inventories (Bull, 2008).
Formula: current assets less inventory/current liabilities
Tesla Motors $256.3/$85.6 = 3
Solar City $227.42/$213.62 = 1.1
: The quick ratios for both of these companies are way above the industry average. This means that the companies can still meet their respective short-term obligations even without selling their stocks.
The ratio analysis done for both Tesla Motors and Solar city, although with minor differences between them, showcases a good performance and increased profitability of the two. The efficiency ratios for both of these companies indicate that they both have good management policies on debt collection, debt payment, and good inventory turnover. This, in turn, plays its role in attracting more customers and investors. The leverage ratios show a favorable financial structure for both firms; a better part of the assets is financed by the organizations. Consequently, the liquidity ratios of these firms indicate that they are placed at favorable position needed in honoring their short-term obligations without difficulties.