Evaluating Tesla’s Existing Investments
Investments usually generate additional costs and benefits away from the initially projected figures. Ratios such as return on invested capital assist in assessing whether an investment is utilizing allocated capital to generate profits. This paper evaluates Tesla’s existing investments and the returns generated by these investments.
Evaluation of Tesla’s Return on Capital Employed
For the fiscal year ending March 2019, Tesla’s return on capital was -13.76% (Gurufocus, n.d). The ROIC indicates Tesla has been making losses instead of returns from capital invested. Part of the loss can be attributed to the present business stage of the firm as Tesla is in the growth stage that is characterized by rapid expansion. In 2017, Tesla produced 1550 Model 3 cars and increased production to 140,000 in 2018 (Tracy, 2018). The expansion required significant capital investment. Moreover, earning returns from this investment was cumbersome as Tesla was and is still developing its infrastructure. The Giga factory that is expected to produce lithium-ion batteries for Tesla is still under construction. Furthermore, the firm has not been maximizing revenue due to below the target sales. Musk stated that shipping the electric cars from the factories to the market located in other geographic locations proved cumbersome. As a result, Tesla did not deliver the vehicles to all markets as expected, leading to a decline in sales.
Also, Tesla has been incurring losses from the sale of its electric cars. For instance, in the first quarter of 2016, the company suffered a loss of 283 million for the 14,810 vehicles sold (Tracy, 2018). Part of the loss can be attributed to quality issues. The car posed challenges such as charging issues and defective drive chains, making them inconvenient. In fact, some of the mechanical problems associated with Tesla’s cars extended beyond the warranty period, causing its customers to incur additional costs. Such issues have resulted in a decline in demand for electric vehicles, causing declining revenue. Notably, Tesla’s Weighted average cost of capital at 3.12% is more significant than the return on capital invested (-13.76%) Gurufocus (n.d). The reason is that the finances raised by Tesla are invested in the manufacture of electric cars such as Model 3, which was unprofitable, leading to losses. Thus, the firm did not recover the funds invested in the manufacturing of such products due to the negative cash flow.
Recommendation to Tesla’s unprofitability
Tesla should limit the expansion of its operations since rapid growth results in business failure. This expansion resulted in significant costs, such as infrastructural development. The growth, if untamed, may lead to high expenses, which may not be recovered by the revenue earned. Moreover, Tesla should eliminate the production of unprofitable models and focus on the more promising electric cars. Given that the firm incurs significantly high costs, it should capitalize on the manufacture of vehicles that bear the least costs to ensure the enterprise remains profitable.
Additionally, Tesla should restructure its business in a bid to enhance its profitability. The firm has been incurring losses for a significant period. Part of the reason has been the logistic challenges encountered as a result of venturing into new markets. To ensure that disruptions such as seeking new markets or production of new models do not interfere with the firm’s revenue, Tesla should consider restructuring. I would also recommend that Tesla refrain from investing in the capital market. In the event of a recession, the capital market would decline and result in a loss of investment for the firm. As a way of diversifying business risk, Tesla should seek to invest in profitable acquisitions. In the event of continuous loss-making in the manufacture of electric cars, the company could be earning revenue from another line of business, such as solar panel manufacturing.
References
Gururfocus (n.d). Tesla Inc. (NAS: TSLA) WACC %:3.12% as of Today. Retrieved from https://www.gurufocus.com/term/wacc/TSLA/WACC/Tesla%2BInc
Gurufocus(n.d). Tesla Inc. (NAS:TSLA) ROC %: -13.76% (As of Mar. 2019). Retrieved from https://www.gurufocus.com/term/ROC/TSLA/ROC-Percentage/Tesla%20Inc
Tracy. T (2018). Is Tesla Losing Money on Every Car Sale? (TSLA). Retrieved from Is Tesla Losing Money on Every Car Sale? (TSLA)
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Question 
Evaluating Tesla’s Existing Investments
You are to complete the Live Case Study at the end of Chapter 6. You will be completing the Live Case Studies for the remainder of the term by researching the company that you have selected. In answering the questions in Live Case Study, you are to answer the questions as laid out in the Framework for Analysis, such as 1,2,3,4,5,…..Also, the sub-sections need to be bulleted. If there is an item that is not applicable, you are to clearly state that. After you have submitted your weekly study, I will grade it and make comments that you need to incorporate into your Case Study.
Researching a particular company will help support your weekly readings. I would suggest that you take a look at Yahoo Finance for information on your researched company. You may also want to go to the company’s website and take a look at Investor Relations, which will give you access to the annual financial statement, SEC filings and the prospectus of the company, along with other information that you will find useful in completing the requirements of the Live Study.
When you are working on your case study, I expect that you will be inserting financial statements and other tables to support your research. These are readily available in Yahoo Finance or the company’s web site under Investor Relations, where you will also find financial statements.