Accounting and Financial Management Assignment 2022

Accounting and Financial Management
Topic: Financial analysis of Tesla Inc.’ for stock market investment
Word Count: 3286

Table of Contents
Part 1 – Critical Analysis of Financial Ratios................................................................................................... 3
Part 2 – Financial Analysis of Tesla Inc........................................................................................................... 4
- Economic significance...............................................................................................................................4
- Financial significance.................................................................................................................................5
- Other factors of consideration for Tesla....................................................................................................5
Analysis of Financial Ratios........................................................................................................................... 6
Risk level of Tesla’s stock for investors.......................................................................................................... 9
Key strategies to use to minimize these perceived risks.................................................................................9
Conclusion.................................................................................................................................................... 9
References.................................................................................................................................................. 11
Appendices................................................................................................................................................. 12
2

Part 1 – Critical Analysis of Financial Ratios
The primary aim of financial reporting is to provide information about the financial position
and performance of companies provided by numbers disclosed in financial statements
which acts as a guide for their decisions (Watts, 1977). Accounting information is used to
evaluate and forecast the profitability, equity growth, cash flow and dividends of
corporates’ economic and subsequent decisions, relying on data arising out of financial
statements or its components.
Financial ratios are the oldest and simplest practical tools in evaluating and planning
companies’ performance (Arkan, 2016). It appeared in the mid nineteenth century and was
always used by accountants and financial analysts. Financial ratios were used by internal
and external users for making their economic decisions including investing and performance
evaluation decisions. Many financial and accounting models have been developed over the
past few decades; however, financial ratios are still used for its classical and fundamental
power as models for financial and planning analysis.
One of the main factors that investors monitor when looking for opportunities to invest
additional resources is to give special attention to “stock price”. The use of accounting data
and financial ratios to explain changes in stock prices is frequently referred to in the
literature Using a financial ratio analysis can be largely attributed to changes in stock prices
and has often been discussed by academics and financial analysts (Arkan, 2016).
The main advantage of using financial ratios instead of amounts from the income statement
is that they are independent of the size of the company. The comparison of financial ratios is
used to assess companies’ financial condition, operations, and attractiveness as an
investment, without the need to provide some financial details.
Matar (2010) defines financial analysis as “a process by which exploration or derivation
group of quantitative and qualitative indicators of economic activity around the project
contributes to determine the significance of the properties of the activities of the operations
and financial position, in order to use these indicators in assessing the performance of the
companies with a view to making decisions”.
When analysing the financial statements of companies, many financial ratios could be used,
these ratios can be divided into several groups and each group studies a certain
phenomenon depending on the intended purpose of the financial analysis for example,
short-term debt holders focusing on the study of specific percentages differ from the ratios
that are focused on and studied by owners’ Long-term debt. Financial ratios are divided into
five categories that all highlight different aspects of a company’s financial and operational
performance to measure liquidity, profitability, debt, operating and investment valuation
(Brigham and Gapenski, 1997).
Though ratio analysis is a very useful financial tool, it does not consider the economic
context in which the firm has been operating in. Furthermore, ratios may be distorted
because they are based on period-end figures (Elliot, 2019), which are fixed and may not
display an accurate representation of the entire business, especially if it is seasonal.
3

However, ratios can be used in conjunction with formulae, to give a more holistic view of
the performance of firm, since they can show a one-sided view.
Part 2 – Financial Analysis of Tesla Inc.
This report discusses a potential investment opportunity for a growth-oriented client
inclined towards the automobile stock market in the United States. The company chosen for
the client is Tesla Motors, Inc. The investor will seek to optimize the long-term potential for
price growth based on its principal. Tesla's stock price is subject to price changes, which the
investor must accept while ignoring all the squeak and noise (Vanguard Group Inc., 2021).
This report analyses Tesla’s stock potential for growth, total returns, price volatility and
financial position for an investor that notably possesses a long-term investment plan.
Tesla Motors, Inc. is the first fully electric car company, and is widely regarded as
remarkable, due to consumer enthusiasm for its sports utility vehicles, sedans, and solar
energy storage systems. They design, develop, manufacture, and distribute high-end electric
automobiles and solar energy storage products in the United States, Europe, China, and
other global markets. Electric sedans and sports utility vehicles are the company's
mainstays.
- Economic significance
Hayes (2020) defines business valuation as “a general process of determining the economic
value of a whole business or company unit. Tesla is a corporation with cutting-edge products
and technologies that have the potential to disrupt large segments of the economy and
boost US economic growth for decades, thus proving to have had a significant impact on the
automobile industry. It has established sales channels with no distributors, as well as
breakthrough technology such as solar energy storage, all have deeper implications for both
the energy and transport sectors.
The firm is poised for growth, as will be seen in the stock analysis later in this report. The
current known nature of Tesla makes it vital for the economy in specific areas related to
employment and inflation, and therefore, of interest to any investors. Tesla has automated
most of its manufacturing processes to save costs on human labour (Hawkins, 2018).
Tesla has significantly embraced new technologies to reduce the overall headcount in the
factory – a move that has suppressed growth in wages. This approach has assisted the
company to mitigate issues associated with skyrocketing labour costs and other
uncompetitive labour practices. Consequently, allowing it to save significantly on employee
compensation and benefits.
Further, Tesla has embarked on disrupting the traditional model of a car dealership by
focusing on online car sales, few showrooms, and almost no advertisement expenses. Tesla
is an exemplar of technological realization and its disruption in economies. Although the
company has a smaller production number relative to gasoline-fuelled cars, the company’s
production capacity is expected to rise each year as demand increases.
4