Tesla Motors has drawn a lot of attention for its sleek, high-performing electric cars. Its Roadster has been an enviro-celebrity favorite for several years, and its new Model S sedan is getting great reviews. The company has been trying to scale up to large-scale production since 2009, raising $226 million in the stock market and $465 million in Department of Energy loans.
But there are growing concerns that Tesla might run out of cash before it can get into full production. The original plan for the Model S was to produce 5,000 in 2012, but the company recently cut that to 3,000. At that level of production, how long will it be until Tesla uses up its sources of liquidity?
Over the last four quarters, Tesla’s internal cash flow deficit was $423 million. That was mainly the result of heavy start-up costs, which caused a $159 million shortfall in cash from operating activities, and from capital spending of $412 million.
Unusually, cash flow from working capital was positive. Tesla has hardly any accounts receivable; instead, it charges customers a $5,000 deposit on each car they order. Customer deposits contributed $100 million dollars to cash flow through the last four quarters.
How has the company recharged its cash batteries? From two sources: cash reserves and loans. Tesla has drawn $109 million from cash reserves and $298 million from the Department of Energy since June 2011. That left Tesla with $211 million in cash at the end of June 2012.
As we noted in an earlier post about Kodak, “cash burn” is commonly defined as “the rate a company uses up cash.” But cash isn’t Tesla’s only source of liquidity. It had $33 million of un-borrowed Department of Energy loan commitments last June.
Combining cash with available borrowing ability, gives Tesla $244 million in liquidity at the end of its latest quarter, compared to $453 million in liquidity a year before. So Tesla has run down its liquidity by $209 million over the last four quarters, or by about $52 million a quarter. That implies Tesla has a little more than one year’s worth of liquidity left ($244 million ÷ $52 million ÷ 4) at its current rate of “liquidity burn.”
And that’s the measure we prefer. Liquidity burn is better than cash burn because it takes ready off-balance-sheet sources of funding into account. It’s a more realistic look at how much time a company has left before its sources of cash need to be recharged.