Week 5 Project

Running head: ACCOUNTING 1

ACCOUNTING 5

Financial Accounting for Tesla Inc.

Sandra Villarreal

South University Online

FIN2030 Fundamental of Financial Management SU01

Dr. Flores

April 5, 2021

Tesla Inc.’s operations and the market in which it operates.

Tesla inc enhances optimal productivity in the automotive and energy solutions business. The operations are based on streamline, high productivity, and operational effectiveness organization. The global expansions of Tesla depend on the operations' success in optimizing overall performance and productivity (Thompson, 2016). The technological innovation goals of the Tesla company support the performance of the operations management. For example, Tesla's manufacturing performance productivity heavily depends on operations management reliability, such as supply chain and inventory management. The market is becoming demanding due to the rise of popular electric vehicles such as Ford motor company and Toyota Motor Corporation.

Therefore, Tesla Inc. must improvise the operational competence against such automakers to improve its market. The optimal operating condition given the current market forces and cost of materials contributes to its ability to sell its products at a reasonable price. For example, satisfying the customer's quality expectations is the main priority to operation management's strategic decisions. Therefore, Tesla Inc. manages to address this strategic objective by researching the automotive and energy solutions and regular quality checks. The operations have been optimized through the logistics and nearness of markets, suppliers, and markets. Tesla Inc. has managed to utilize its global reach through its resources such as Asia, Europe, and United States.

Evaluate the EVA and free cash flow using Tesla Inc.’s annual report

Tesla Inc. is a cyclical firm; this implies that it suffers in the recession period and prosper in economic growth times (Liu, 2021). Therefore, it is challenging to evaluate its earnings and cash flows due to its close relationship to the economy. The stock's value is estimated upon the present value of some cash flow measures in discounted cash flow (DCF) valuation techniques. After direct costs and initial payments to capital suppliers, the Free Cash Flow to the Firm (FCFF) s often referred to as cash flows. It is an important metric that allows viewing the amount of actual cash available to Tesla Company. The Tesla Inc. Free Cash Flow for 2014 was -2,086,054, which was a decrease of 2,130,600 from the previous years was. The annual report for 2015-2020 shows an increase in the FCFF for Tesla Inc. A reduction of FCF is troublesome since it means that the company cannot sustain growth. Moreover, without enough FCF, Tesla company may not have the liquidity to stay in business.

On the other hand, Economic value added or economic profit for Tesla Inc. is the difference between the costs and revenues. The costs are inclusive of expenses and cost of capital. Economic profit is a measure of corporate performance (Dybek, n.d.). Therefore, it computes the spread between the cost of money and the return on invested capital, and finally, the invested capital is multiplied. Most notably, the EVA supports the idea that Tesla Inc. is making a profit for its shareholders and owners through creating wealth. Therefore, it is a better indicator than net income.

The managers are encouraged to take assets and liabilities into consideration due to the balance sheet numbers included in the EVA. Therefore, when a firm gives a positive EVA, the management has created value for its shareholders. However, if the EVA is negative, the management has failed to increase the shareholder's value (Dybek, n.d.). The data financial statement for Tesla Inc. shows that the Economic Value Added (EVA) increased from 2018 and 2019. However, a significant drop was recorded from 2019 to 2020; This means that the shareholder value decreased between 2019 and 2020.

Analyze the Tesla Inc.’s ROA and ROE

Tesla Inc.'s value is compared to that of its competitors to determine its financial worth. Tesla Inc. is rated fourth among related companies in the category of return of equity. Moreover, it reports 0.52 of Return On Asset per Return On Equity. Therefore, the ratio for Tesla’s Return on Equity to Return On Asset is nearly 1.92. The 2020s tangible asset value is expected to grow by 7.8 billion dollars. The Return on Equity (ROE) gives the company shareholders information on how their money is being utilized or reinvested to generate income. The average of 10% and 30 % is desirable for providing shareholders with dividends and maintaining funds for their future growth. Therefore, Tesla Inc. fulfills the bare minimum. However, investors should be careful when using ROE as the only efficiency indicator since it can be high when the company is leveraged.

On the other hand, Return On Assessment (ROA) shows how the company generates income after utilizing all the assets at its disposal (Macroaxis LLC (www. macroaxis.com), n.d.). ROA is helpful since it evaluates the performance between different departments of the firm. Moreover, it promotes performance management over time; therefore, ROA measures the overall efficiency in generating profits its total assets. Tesla Inc. is rated third among its competitors in return of Assets. A low ROA implies that the company is asset-intensive. Therefore, the company will need more money in the future to continue generating revenue.

References

Dybek, M. (n.d.). Tesla Inc. (NASDAQ:TSLA). Stock Analysis on Net. Retrieved April 5, 2021, from https://www.stock-analysis-on.net/NASDAQ/Company/Tesla-Inc/Performance-Measure/Economic-Value-Added

Liu, S. (2021). Competition and Valuation: A Case Study of Tesla Motors. In IOP Conference Series: Earth and Environmental Science (Vol. 692, Issue 2, p. 022103). https://doi.org/10.1088/1755-1315/692/2/022103

Macroaxis LLC (www. macroaxis.com). (n.d.). Tesla Return On Equity vs Return On Asset. Retrieved April 5, 2021, from https://www.macroaxis.com/invest/ratioCompare/TSLA--Return-On-Equity--Return-On-Asset

Thompson, A. (2016, September 11). Tesla, Inc.’s Operations Management: 10 Decisions, Productivity. http://panmore.com/tesla-motors-inc-operations-management-10-decisions-areas-productivity