Is Tesla (NASDAQ:TSLA) A Risky Investment?

editorial-team@simplywallst.com (Simply Wall St)

Wed, Nov 22, 2023, 5:00 AM 4 min read

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Tesla, Inc. (NASDAQ:TSLA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tesla

What Is Tesla's Net Debt?

As you can see below, at the end of September 2023, Tesla had US$3.70b of debt, up from US$2.40b a year ago. Click the image for more detail. However, it does have US$26.1b in cash offsetting this, leading to net cash of US$22.4b.

debt-equity-history-analysis — NasdaqGS:TSLA Debt to Equity History November 22nd 2023

A Look At Tesla's Liabilities

Zooming in on the latest balance sheet data, we can see that Tesla had liabilities of US$26.6b due within 12 months and liabilities of US$12.8b due beyond that. Offsetting these obligations, it had cash of US$26.1b as well as receivables valued at US$2.70b due within 12 months. So its liabilities total US$10.7b more than the combination of its cash and short-term receivables.

Having regard to Tesla's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$749.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Tesla also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Tesla's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tesla can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tesla may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Tesla recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Tesla's liabilities, but we can be reassured by the fact it has has net cash of US$22.4b. So we are not troubled with Tesla's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Tesla that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.