Investment Analysis

Posted: August 27th, 2021

Week 8 Investment Analysis

Name

Institutional Affiliation

Question 1: Detailed Overview of Tesla Inc.

I chose Tesla Inc. Corporation as an investment option that is a publicly-traded company in the U.S.  It is a multinational company established on 1st July 2003 with its headquarters in Palo Alto, California. The company’s core business is in the auto-manufacturing industry. It operates in designing, developing, manufacturing, leasing, and selling electric and energy-driven vehicles to various countries, such as China, Norway, Netherlands, and other foreign countries (Tesla, 2021). Its products include solar panels, solar roof tiles, and electric cars. The company was ranked the best electric car producer in the year 2019. It has employed over 48,000 full-time employees by the end of the financial year 2020. The firm’s fundamental and technical analysis indicates a bullish situation in its stock. Hence, it is suitable for investment. I selected this stock for my client because it is ethical and has a solid financial and economic standing.

Question 2: Provide The Rationale for Your Selection and Plans for A Diversified Portfolio

              Tesla is the best investment option for the client due to its visionary leadership and future high growth earnings. The leadership comprises of the CEO Elon Musk, who is also its co-founder. His visionary leadership has led the organization to be a global leader in the manufacture of electric vehicles. The success is mostly attributed to Musk making the expensive electronic car manufacture technology more affordable, through creating adequate demand that enables mass production (Tesla, 2021). Musk has also developed a public profile that is instrumental in saving the business marketing costs.  Thus, green technology investment is the route most governments are encouraging as an essential tool in combating the adverse effects of climate change.

             Successful companies are known to have visionary leadership that ensures business goals are achieved on time. Tesla does not spend much on advertising costs due to the efficient word of mouth utilization and excellent social media to market its brands. The CEO has developed significant media interest in his products, with the media coverage a key driver of its sales leads. The vehicles meet high safety standards, with the company developing the infrastructure to support its products. The development of its infrastructure includes its rapid charging station network (Tesla, 2021). It also owns the complete distribution chain of its stores. The benefit is that it affords the company control customer experience while also strengthening its brand reputation. Hence, investing in the business is a sound investment option due to visionary leadership. This is sustained through a model that focuses on saving operational costs on advertising expenses.

              A diversified portfolio reduces the risk accruing to the investor. Tesla’s investment options include the company not occupying more than 20% of the value of the diversified portfolio (Tesla, 2021). The company should be a long-term investment in the portfolio, as the has promising high returns for the future.

Question 3: Ratio Analysis

Table 1: Tabulation of Ratio Analysis

Year	2018	2019	2020
Current ratio	0.83	1.13	1.88
Debt/Equity ratio	2.08	1.8	0.51
Operating margin	-1.81%	-0.28%	6.32%
Inventory turnover	5.6	5.77	6.07
ROE	3.74	-10.38	-18.46

The five ratios under analysis are current ratio, Debt/equity ratio, operating margin, inventory turnover, and return on equity (ROE). The current ratio falls under the liquidity ratios that measure the short-term ability of Tesla Inc. to settle its financial obligations (Easton et al., 2018). The ratio is given by the division of the current assets and liabilities. For three years, the corporation’s ratio gradually improved from 0.83 in 2018 to 1.13 in 2019 to 1.88 in 2020. The current ratio in the three years is a positive figure implying that the current assets are more than the liabilities. Hence, the company has adequate cash to settle its financial obligations as they fall due. 

The debt/equity ratio is a leverage ratio that indicates how a firm is financing the operations by debt compared to shareholders’ funds. The ratio is given by dividing the business’s total liabilities with the shareholders’ equity (Easton et al., 2018). Tesla’s Inc. has been managing its debt financing as indicated by reducing debt to equity ratio in the three years. The debt/equity ratio is 2018 was 2.08, followed by 1.8 in 2019 and 0.51 in 2020. Therefore, the company can get debt financing if it wants to expand its operations. Equally, it can fund a new project as a lower ratio implies that it is using more shareholders’ funds than debt financing.

The operating margin is an efficiency ratio that shows how much profit a firm generates after settling its variable costs like raw materials and wages. It is given as a percentage of sales. The operating margin in 2018 was -1.81% that improved to -0.28% in 2019 and 6.32% in 2020. The increasing ratio indicates that the firm has less risk on its operations and is well managed (Easton et al., 2018). Inventory turnover is also an efficiency ratio showing how many times the average stock is sold within a period. It indicates how a firm is effectively managing its stock as compared to the cost of goods. The company’s inventory turnover ratio was 5.6 in 2018, 5.77 in 2019, and 6.07 in 2020. This implies that the stock was sold 5.6 times in 2018, 5.77 times in 2019, and 6.07 times in 2020. Therefore, Tesla’s stock management has been improving in the period under consideration.

Finally, ROE is a profitability ratio measuring financial performance. It is provided by the division of the net income and shareholders’ equity. Tesla’s ROE for the period was 3.74 in 2018, -10.38 in 2019, and -18.46 in 2020. The negative ROE indicates that the company is ineffective in utilizing its equity capital (Easton et al., 2018). Therefore, the company should improve ROE by raising the selling price, reduce labor costs and operating expenses, and reduce the cost of goods sold.

Question 4: Analyze The Price of the Investment to Stock Market Beta for The Past Five Years

The company’s production surpassed one million units of electric cars with a P/E ratio of 1682.99. This implies that the company is overvalued above the industry average reporting of 28.82. Therefore, it is more expensive to invest in Tesla Inc. compared to other corporations in the industry (Tesla, 2021). Additionally, performing a comparison in the present price to book (Price/Book) value ratio depicts that the business trades at 116.16 times the book value. The high ratio indicates that it is highly valued from the industry average of 2.38. Besides, it was noted that approximately 90% of the industry companies valued way cheaper than the company’s products. Therefore, the investment price is higher than the industrial average in the past five years.

Question 5: Trend Line

Figure 1: Trend line for company financial performance

Question 6: Type of Investor

A long-term investor is the best candidate for Tesla due to the long-term investments in the company with a focus on producing environmentally friendlier vehicles. The company projects production of over twenty (20) million vehicles annually due to the increasing demand for electric vehicles. The company expects to meet this demand by opening a Berlin factory to produce over 500,000 vehicles and another Gigafactory in Texas. The construction of both factories is significant as it allows the company to scale production to over 4 million vehicles annually from the existing 500,000 vehicles (Hansen, 2021). Tesla is also witnessing rising demand for its products in China and other emerging economies, which account for more than 40% of the world’s population. Government support is also a major influencer impacting Tesla’s success. Government authorities establish policies and grant subsidies to tackle global warming that favor the adoption of zero-emission vehicles. The impact is that they drive growth volumes and expectations for the company, with the quick acceptance of electronic vehicles in the market a contributing factor. Therefore, investing in the long term for the company affords an investor a worthwhile investment that guarantees them high returns.

References

Easton, P. D., McAnally, M. L., Sommers, G. A., & Zhang, X. J. (2018). Financial statement        analysis & valuation. Boston, MA: Cambridge Business Publishers.

Hansen, R. (2021). Opinion: Why Tesla is not a safe stock for long-term investors.             MarketWatch. Retrieved 1 March 2021, from https://www.marketwatch.com/story/why-          tesla-is-not-a-safe stock-for-long-term-investors-11611128923.

Tesla. (2021). Retrieved 1 March 2021, from https://www.tesla.com/elon-musk.