What’s That Burning at Tesla?

We blogged about Tesla just over a year ago, looking at what we called the company’s “liquidity burn.” We thought they only had about a year’s worth of liquidity left. Since then, burning through liquidity hasn’t been Tesla’s biggest problem. Instead, Tesla’s troubles have been with burning cars. Three of its sleek Model S cars have caught fire recently, and that may hurt sales or force a recall. Can Tesla afford it? A slowdown in sales or a recall would hurt cash flow, which has been improving lately. Free cash flow was $25.8 million dollars in the third quarter this year, driven by the success of the Model S. If cash flow falters, Tesla’s next line of defense will be its liquidity reserves, which also have grown a lot in 2013. Tesla used to keep about $200 million in liquidity in the form of cash and short-term investments. But in May 2013 the company raised $660 million in the convertible bond market and $617 million in the equity markets, using $452 million to repay its loans from the U.S. government and $178 million to hedge the convertible bonds. Tesla used the remaining $647 million to recharge its liquidity reserves. At the end of September 2013, they stood at $795 million. Is that enough? The size of a liquidity reserve should be based on the company’s ability to generate free cash flow and its vulnerability to event risk. Event risk is the unexpected need for cash caused by natural disasters, accidents, and product recalls. The cost to Toyota for its 2009 recall of 8.1 million cars for faulty break pedals was...

How Long Before Tesla Runs Out of Juice?

Tesla Motors has drawn a lot of attention for its sleek, high-performing electric cars. Its Roadster has been an enviro-celebrity favorite for several years, and its new Model S sedan is getting great reviews. The company has been trying to scale up to large-scale production since 2009, raising $226 million in the stock market and $465 million in Department of Energy loans. But there are growing concerns that Tesla might run out of cash before it can get into full production. The original plan for the Model S was to produce 5,000 in 2012, but the company recently cut that to 3,000. At that level of production, how long will it be until Tesla uses up its sources of liquidity? Over the last four quarters, Tesla’s internal cash flow deficit was $423 million. That was mainly the result of heavy start-up costs, which caused a $159 million shortfall in cash from operating activities, and from capital spending of $412 million. Unusually, cash flow from working capital was positive. Tesla has hardly any accounts receivable; instead, it charges customers a $5,000 deposit on each car they order. Customer deposits contributed $100 million dollars to cash flow through the last four quarters. How has the company recharged its cash batteries? From two sources: cash reserves and loans. Tesla has drawn $109 million from cash reserves and $298 million from the Department of Energy since June 2011. That left Tesla with $211 million in cash at the end of June 2012. As we noted in an earlier post about Kodak, “cash burn” is commonly defined as “the rate a company uses up...

Developing Problems at Kodak

Kodak’s cash burn was a big concern among analysts in the last months before the firm’s bankruptcy in January of this year. Cash burn is a term that gets thrown around a lot when companies are in trouble, but it’s hard to find a definition for it in books on accounting or financial statement analysis. Accountingglossary.net defines cash burn as “the rate that a company uses up cash” and calculates it as “Total Cash Change / Time Period.” We think that’s a useful approach to analyzing how a company consumes its cash, although we think we have a better way. Our method starts with the company’s Internal Cash Flow. To calculate Internal Cash Flow, start with the company’s cash flow statement and use the values presented there. The formula is: Internal Cash Flow = Cash Flow from Operating Activities + Cash Flow from Investing Activities + All Uses of Cash in Financing Activities. Cash flows with negative values in the cash flow statement have negative values in the formula. Uses of cash in financing activities include debt repayment, dividends, share repurchases, and any other outflow in that part of the cash flow statement. Internal Cash Flow includes all operating and investing sources of cash and all operating, investing, and financing uses of cash. It’s cash flow before external financing, so it excludes cash from borrowings, debt issues, and equity issues. If Internal Cash Flow is negative, the company is not generating enough cash in the period to meet all of its needs. That leaves it with only two ways to plug the cash gap: get financing or use cash...

Liquidity Position

There are lots of measures of liquidity. The classics are the current ratio and the quick ratio, but they’ve fallen out of favor because they don’t include cash flow, a critical component of liquidity. Cash burn is too recent to be classic, even though it’s been around for a while. But it’s limited to on-balance-sheet sources of liquidity. The liquidity position is the latest addition to the liquidity analysis toolkit. It has limitations, but we like it because it includes internal and external sources of funds. Here’s a short slide show about...

Bear’s House of Cards

There’s a new book about the collapse of Bear Stearns. It’s House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan, and it is getting good reviews. The New York Times calls it “…high drama that is gripping…”   The story may not seem so relevant or interesting today. After all, Bear’s demise was a year ago; Lehman’s was only last September. Bear’s vital organs were saved by transplant into the body of J.P. Morgan; Lehman was allowed to expire in the emergency room.   But we think the book will answer questions about Bear that are as urgent and compelling today as they were when the company failed. What brought the Bear down? Was it just arrogance, or did negligence, ignorance, or bad luck play a role? Was it ruthless attacks by short sellers or mainly extreme market conditions?   Mistakes in Liquidity Management Whatever else contributed, mistakes in liquidity management were important in the company’s downfall. Thanks to the failure of two of its own hedge funds, Bear was painfully aware of problems in the financial markets. It took steps to improve liquidity, increasing cash and unpledged securities from $27.7 billion in November 2007 to $35.2 billion in February 2008.   It was too little, too late. By Bear’s own reckoning, those sources of liquidity in February had to cover at least $21.7 billion in potential uses, including maturing unsecured debt, funding commitments, and standby letters of credit. That left only $13.5 billion to cover client withdrawals and secured funding shortfalls.   At the time, Bear owed $91.6 billion to...