When a pristine balance sheet is not enough: Tesla vs Ford & GM
Last week, Tesla announced they had the highest market cap of any car company in the world.
On today’s numbers, the comparisons are straightforward. Tesla’s $51B vs Ford’s $45B and slightly ahead of GM at $50B and change.
Last week Tesla was still behind GM. Based on this article from Bloomberg where they took debt off market cap, Tesla were ahead. For the sake of argument, let’s accept Tesla’s position.
Then there’s the whole question of whether Tesla even is a car company. Their offer to put in a set of batteries in South Australia as an energy solution suggests otherwise. That’s a story for another day.
The Bloomberg article compares Tesla to the shale exploration industry. The main comparison between the two is what new players are doing to the incumbents.
The other theme that comes through is a sense of contempt for the new players. The incumbents, in comparison, have “pristine balance sheets” and “free cashflow”. It’s pretty clear which he prefers.
As a CFO, most of my work is around two things. First, how to fund a growing business. Second, how to keep the balance sheet strong enough to improve funding options and to ride the economic waves.
So what is a “pristine” balance sheet.
There’s three main elements.
Firstly, the debt ratios. GM has approx $74B in debt and $215B in tangible assets. That’s 34%. Below 40% is a good place to be. They also have approx $25B in the bank, some analysts will reduce the debt (and assets) by this amount. In GM’s case this improves the ratio further.
Second, the portion of short term vs long term debt. For GM, short term is approx a third, so no cause for alarm. How much are they going to have to renew in the short term, and how will the banks feel about that.
Remember the GFC? Those with very large current debt balances ran into some pretty major problems. People have long memories on this one. The car industry in particular!
Third is the overall health of working capital. How much is tied up in receivables and inventory. How long is it taking to collect receivables vs pay payables. Again, for GM, these all look good.
What does all that mean? GM could raise either debt or equity if they needed to (given the $25B in the bank, that’s not likely).
None of that is helping their stock price, they’ve moved between $29 and $38 per share over the last two years. Compared to Tesla, they do pay dividends, not enough to keep up with the rise in Tesla stock.
For Tesla, their debt to asset ratio is approx 30% (about the same as GM). Their short term debt is very low. The only thing that stands out about their working capital is a high inventory level.
Hence their balance sheet is only slightly less “pristine” than GM’s.
They do need to raise money to fund losses. That is true. Given their stock price, that doesn’t seem to be getting in their way.
Let’s say they couldn’t raise capital. They may need to slow down their investments and run down their holdings of inventory. I can’t imagine that would thrill Elon Musk. Something for Tesla’s board to manage, should that come to pass.
Hence while I am always a fan of a pristine balance sheet, I’m not sure I see the relevance. Especially if you want to understand why Tesla is now valued more highly than GM.
This market cap is more akin to what Google did to the media industry. New technology, disruption, a high profile CEO and a lot of market froth. We’ve seen it before.
May we live in interesting times.
Please note: this is NOT financial advice, as I’m not licensed to give you any. Any share purchase decisions you make are your own :).