Financial Decision Making at Tesla Co.,Ltd: A Detailed Report

This report provides an in-depth analysis of Tesla's financial decision-making processes, utilizing the company's annual reports and relevant financial theories. It explores long-term sources of finance, evaluating their risk and return characteristics and discussing the concept of an optimum capital structure. The report also examines Tesla's working capital management strategies, comparing aggressive and conservative approaches and assessing liquidity ratios. Furthermore, it delves into Tesla's dividend policy, considering its relevance and impact on shareholders. Finally, the report analyzes Tesla's profitability using various financial ratios, compares them with a competitor (Toyota), and discusses the influence of the external economic environment, incorporating the Capital Asset Pricing Model (CAPM) to assess risk and return.

Financial Decision Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Long term sources of finance......................................................................................................3
Working capital management.....................................................................................................4
Dividend policy...........................................................................................................................5
Profitability and risk....................................................................................................................6
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
APPENDIX....................................................................................................................................11

INTRODUCTION
For the business to get successful it is very crucial that the proper financial decisions are
being taken. This is because of the reason that in case the finance will not be managed in proper
and effective manner then this will be impacting the working. The present study is based on
Tesla which is an American vehicle company founded in 2003 and manufactures electric cars,
solar panels. Solar roof tiles and many other related products. The current report will outline the
different long term sources of finance and their risk and return characteristics. Further the
discussion will take place relating to working capital and different types of working capital
management. Moreover, the report will outline the dividend policy of the company and the why
directors use the policy. In the end the profitability aspect of Tesla will be discussed along with
the analysis of external economic environment.
MAIN BODY
Long term sources of finance
The finance is an element without which the company cannot perform its operations.
Hence, it is very crucial for Tesla that they optimally utilise all the finance. There are different
sources through which the finance can be gathered and used within the business. These different
sources are as follows-
The first and foremost long term source of finance for company is the internal equity as
per the pecking order. This is the sources wherein the company undertakes the use of retained
earnings and other sources which are internal to the company and belongs to the shareholders.
After that comes the internal debt in which Tesla can borrow money in form of loan or
any other debt which need to be repaid again. The internal debt is that one involves borrowing
money from any person internal to the company.
In addition to his, another source of long term finance is the market debt wherein
company can take loan from bank or can issue debenture. This is a good a source of finance
because it does not involve ownership within the company (Mousavi and Lin, 2020). the risk
associated is that the asset may need to be mortgaged in against of the loan.
Another source of finance as per pecking order theory is the external equity in which
Tesla will raise capital by issuing new capital within the market. The risk is that profitability
depends on the operation of market and in case market working will not be good then this will be

impacting the profits of company. The risk and return of every source of finance depends on the
situation and purpose for which the finance is being borrowed.
On the other hand, the static trade off theory states that the capital structure of the
company is being finalised by the trade- off value of the tax rates. This trade off theory assist
Tesla in deciding that how much balance need to be made between the equity and debt in order
to have optimum capital structure (Madrian and et.al., 2017). Further as per the pecking theory
the order of sources of finance is fixed. But in case of static theory the order is not fixed rather
the selection of the long term sources of finance is based on the trade- off of risk and return.
Gearing ratio
Attached in appendix
With the above analysis it is clear that the gearing ratio of Tesla is low in comparison to
the competitor that is Toyota. This is not good for tesla as they are only having 39.6 % currently
which implies that company is having low debt component within the company. on the other
hand, Toyota is having a gearing ratio of 70.8 % and 60 % which is very high. the company must
have the gearing ratio between 25 % to 50 % as ideal. This is because of the reason that this
capital structure is optimal and this provides a proper combination of debt and equity within the
company.
Working capital management
Working capital is being defined as the strategy through which company ensures that
there is proper balance between the current asset and liabilities of the company. in order to get
successful, it is necessary for business that they must effectively use their current asset and
current liabilities to meet the operational activities of the business. a good working capital
management assist Tesla in meeting all their financial obligations and also add within the profits
of the company (Sensini, 2020). The aggressive working capital policy states that company must
spend as much money which they can on the production and moving and delivering the product
to the consumers. On the other hand, conservative approach to working capital management
states that money must be saved so that in case of any contingency it can be used in proper
manner. The focus of aggressive working capital approach is on high risk and high return while
conservative approach focuses on lower risk and low return.
For the company it is necessary to maintain proper liquidity so that business can operate
in proper manner. The liquidity refers to the capability of company in converting the current

asset into cash within very less time (Pakdel and Ashrafi, 2019). For the proper management of
working capital it is necessary that Tesla is having proper liquidity. Hence, for this, some of the
liquidity ratios are being calculated for the company which are as follows-
Ratios
Attached in appendix
By evaluating the working capital ratio, it is clear that the ratios of Tesla reflect that the
liquidity of the company is low as compared to last year. In the year 2020 the ratio of 1.88 times
whereas in 2021 it was 1.39. this implies that liquidity of the company has reduced to a great
extent. for the better liquidity it is necessary to have the ratio of 2:1 which states that for every
single current liability there need to be twice current asset. However, in the present case the ratio
states that there is 1.39 times the current asset for every current liability. In comparison to Toyota
the current ratio is better for the company as it is 1.64 which implies there is 1.64 times current
asset for every current liability. Moreover, with help of the inventory holding days is 188 days
for Tesla and 18 days for Toyota. For Tesla the inventory days are very high which is not good.
This is because of the reason that it implies that Tesla will take 188 days for converting
inventory into cash. This is not good position because it takes a lot of time and the cash will be
blocked in the inventory. So this will not be a good position for Tesla and they need to reduce the
inventory days.
Dividend policy
The dividend policy is being defined as the policy used by the company for structuring
the dividend pay- out of the company to the related shareholders. The dividend policy assist
Tesla in analysing the fact that whether the payment of cash dividend need to be paid or will be
paid as increased dividend at later stage. The dividend policy need to be set in order to manage
the working in better and effective manner (Booth and Zhou, 2017). The two set of approaches
for dividend policy is to treat dividend policy immaterial or irrelevant. On the other hand,
another approach emphasizes on treating the dividend as the relevant policy.
In addition to this, the Clientele dividend theory is the one which states that investors can
have a direct impact over the price of the security in case there is a change within dividend, tax
or any other related policy (Cruciani, 2017). These changes affect the dividend policy because all
these creates an impact over the investment objective of the person to a great extent. along with
this, the clientele theory is based on the assumption that some specific investor is attracted

towards the various company policies. Moreover, the company can make some changes within
the dividend policy but these changes do not have any impact over the share values.
For keeping the shareholders attracted towards the company it is necessary that proper
attraction is being provided to them. This particularly includes payment of the dividends in order
to keep the shareholders attracted towards the company. the reason pertaining to the fact is that
in case the dividend will not be paid on time then this will be affecting the working of the
company (Kadim, Sunardi and Husain, 2020). By analysing the annual report of Tesla it is clear
that every stockholder received the dividend of four additional shares for every common share
hold by the person. Along with this, the company also has not declared or anticipate payment of
cash for the foreseeable future. This is because the company cannot predict the future working
and due to this the company does not declare the dividend.
Profitability and risk
The analysis of the profitability it is very important for the company that they analyse the
financial statement in proper and effective manner. The reason underlying this fact is that in case
the company will not be earning good amount of profit then the working will not be giving more
outcome (Shi and et.al., 2019). Hence, for this Tesla need to evaluate the profitability of the
business continuously.
Ratio
Attached in appendix
By analysing the profitability ratio of the company it is clear that the profitability of
company has increased in comparison to the last year. The reason underlying this fact is that the
profit margin has increased for Tesla and this is good for the efficiency of the company ( Kraus
and Feuerriegel, 2017). But this is not much good for the company as the revenue of the
company has reduced to a great extent. This is not good because the operations of the company
have reduced and the net profit has increased. In actual the company has to work on increasing
the revenue and then try to increase the profitability ratios of the business. Moreover, with help
of the return on capital employed it is clear that the return has reduced slightly. In the year 2020,
it was 5.3 % and in 2021 it increased to 5 %. This is not good for the company as in case the
return to the shareholders will be reducing more than this will distract them and they might take
back their investment. Hence, it is recommended to Tesla that they must work on improving the
sales of the company. For this, they must invest within the good marketing strategies so that

consumer gets attracted towards the product and services of company and ultimately sales will
increase. Further with the analysis of the profitability ratio it is evident that the gross profit is
increasing where is the net profit is reducing. This simply implies that the indirect expenses of
the business are very high and Tesla needs to manage and reduce those expenses. In case
company will be in position to reduce those expenses then the net profit of the company will
increase which will be beneficial for the company to improve its performance and operations.
Capital asset pricing method (CAPM)
The Capital Asset pricing method is a type of method which assists in analysing the
relationship between the systematic risk and the return which is expected from the assets. This is
particularly being used in case of stocks. This CAPM method is used in order to finance the
pricing of risky securities and try to expect the higher returns. In the present case of Tesla
suppose team risk free rate is 3% and the market return is 6%. Then in case of Beta of 1.5 the
company will have the CAPM of 7.8 %. This number implies that the returned by analysing the
risk of the securities 7.8%.
As per the Minsky analysis it is clear that modern capitalism is necessary and acquires
long-lived capital assets. This analysis is necessary in order to gain access to the financial market
and to improve the performance of the company. The Minsky movement is the sudden collapse
within the market after a long period of speculative activities. This involves high debt amount
which is been taken by the investors.
Along with profitability it is also very crucial for the business that they must analyse the
external environment as well. The reason underlying this fact is that business operates in external
environment and it is necessary for Tesla to include all the external changes as well. This is
necessary because the business is working in external environment and uses all the resources
from the external environment. Thus, with help of PEST analysis Tesla can identify the changes
taking place in external environment and its impact over working.
Element Description
Political The political factor is the changes within the
Government of these regulatory bodies. All
these changes affect the working of the
business to a great extent because the business
operates in external environment and in

accordance to the requirement of government.
The political factor involves changes in
government policy and rules and regulations.
Currently government is providing subsidies to
the company who are working in betterment of
environment. Thus, this is an opportunity to
Tesla and this can improve the working of
country to great extent.
Economic The economic factor involved the different
factors which govern the whole economy such
as interest rate inflation purchasing power
exchange rate and many other economic
factors. In order to operate in economic
environment it is necessary for Tesla to take
care of all these particles effectively. Currently
with respect to economic factor, the purchasing
power of consumer is increasing (Tesla, Inc.
PESTEL/PESTLE Analysis &
Recommendations, 2021). This is an
opportunity to the company as more people
will be buying the vehicles with latest
technology. hence, Tesla can grab the
opportunity and improve the business.
Social The social factor involves the taste and
preference of the consumer and currently they
are attracted towards the latest electric cars.
Hence, Tesla can improve the working to a
great extent and can improve the operations.
Technological The use of technology is very important for
getting successful. Hence, Tesla is working in
the direction of implementing latest technology

within their vehicles and other products. Thus,
this will result in increasing the sales of the
company and operations will improve.
CONCLUSION
The above report evaluated that financial decision making is very important for the
success of the company. The reason underlying this fact is that in case the decision is not taken
in proper and effective manner then the finance cannot be optimally used. The above report
evaluated that it is necessary for business to set proper structure of long term finance. This is
pertaining to the fact that in case the capital structure will not be balanced then it can affect the
working efficiency. Moreover, the report also highlighted that for management of working
capital it is necessary to have good liquidity which Tesla is not having currently. Along with this
in the end it was analysed that profitability of Tesla has increased in comparison to last year
which is good.

REFERENCES
Books and Journals
Booth, L. and Zhou, J., 2017. Dividend policy: A selective review of results from around the
world. Global Finance Journal. 34. pp.1-15.
Cruciani, C., 2017. Investor decision-making and the role of the financial advisor: A behavioural
finance approach. Springer.
Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting. 6(5). pp.859-870.
Kraus, M. and Feuerriegel, S., 2017. Decision support from financial disclosures with deep
neural networks and transfer learning. Decision Support Systems. 104. pp.38-48.
Madrian, B. C., and et.al., 2017. Behaviorally informed policies for household financial
decisionmaking. Behavioral Science & Policy. 3(1). pp.26-40.
Mousavi, M. M. and Lin, J., 2020. The application of PROMETHEE multi-criteria decision aid
in financial decision making: Case of distress prediction models evaluation. Expert Systems
with Applications. 159. p.113438.
Pakdel, M. and Ashrafi, M., 2019. Relationship between Working Capital Management and the
Performance of Firm in Different Business Cycles. Dutch Journal of Finance and
Management. 3(1). p.em0057.
Sensini, L., 2020. Working capital management and performance: evidence from Italian
SME’s. International Journal of Business Management and Economic Research
(IJBMER). 11(2). pp.1749-1755.
Shi, X., and et.al., 2019. A hybrid decision-making approach for the service and financial-based
measurement of universal health coverage for the E7 economies. International journal of
environmental research and public health. 16(18). p.3295.
Online
Tesla, Inc. PESTEL/PESTLE Analysis & Recommendations. 2021. [Online]. Available through:
< http://panmore.com/tesla-motors-inc-pestel-pestle-analysis-recommendations>

APPENDIX
Gearing ratio
Particular Formula Tesla Toyota
2020 2021 2020 2021
Long term debt
1417
0
1128
9
178480
1
199319
6
Shareholders’ equity
2373
0
2849
4
252053
7
332255
0
Gearing ratio
formula
Long-term debt / shareholders’
equity
59.7 39.6 70.8 60.0
Current ratio
Particular Formula Tesla Toyota
2020 2021 2020 2021
Current assets
2671
7
2500
2 173988
3
194808
1
Current liabilities
1424
8
1805
1 974314
118823
9
Current Ratio Current assets / Current liabilities 1.88 1.39 1.79 1.64
Quick ratio
Particular Formula Tesla Toyota
2020 2021 2020 2021
Current assets
2671
7
2500
2
173988
3
194808
1
Current liabilities
1424
8
1805
1 974314
118823
9
Inventory 4101 5199 255738 292461
Prepaid expenses 1346 1746
Quick Ratio (Debtors / sales)*365 1.49 1.00 1.52 1.39
Inventory days
Particular Formula Tesla Toyota
2020 2021 2020 2021
Inventory 4101 5199 255738 292461
Cost of sales
2490
6
1009
7
166492
3
162789
4
Inventory Holding
days (Inventory / COGS)*365 60 188 15 18

Receivable days
Particular Formula Tesla Toyota
2020 2021 2020 2021
Debtors 1886 1962 867088 962270
sales
3153
6
1375
7
217135
5
211830
2
Debtors collection
Period (Debtors / sales)*365 22 52 146 166
Payable days
Particular Formula Tesla Toyota
2020 2021 2020 2021
Payable 6051 8260 519330 613579
Cost of sales
2490
6
1009
7
166492
3
162789
4
Payable collection
period
(Payable/ Cost of sales) *
365 89 299 114 138
Conversion cycle
Particular Formula Tesla Toyota
2020 2021 2020 2021
Inventory days 60 188 15 18
Receivable days 22 52 146 166
Payable days 89 299 114 138
Cash conversion
cycle ID + RD - PD -6.75
-
58.60 47.26
46.2
0
Return on capital employed
Particular Formula Tesla Toyota
2020 2021 2020 2021
Earnings Before Interest and
Tax 1994 2004 128233 118159
Total assets
5214
8
5783
4
527965
3
650398
6
Current liabilities
1424
8
1805
1 974314
118823
9
Capital employed
Total assets - Current
liabilities
3790
0
3978
3
430533
9
531574
7
ROCE ratio EBIT / Capital employed 5.3% 5.0% 3.0% 2.2%

Gross profit margin
Particular Formula Tesla Toyota
2020 2021 2020 2021
gross profit 6630 3660 506432 490407
Revenue
3153
6
1375
7
217135
5
211830
2
Gross profit
margin Gross profit / sales * 100 21.02 26.60 23.32 23.15
Net profit margin
Particular Formula Tesla Toyota
2020 2021 2020 2021
Net profit 862 1659 150187 141435
Revenue 31536 13757
217135
5
211830
2
Net profit
margin Net profit / sales * 100
2.73
%
12.06
% 6.92% 6.68%
Capital asset pricing method (CAPM)
Particulars Formula Figures
Rf (Risk free rate) 3%
Beta 1.5
Rm (market return) 6%
CAPM Rf + Beta (Rm - Rf) 7.8%