Tesla has become nearly debt-free in just two decades, a feat unheard of in the more than century-long history of the auto industry. How the electric vehicle company was able to keep its debt down has set a new precedent for auto makers, as well as putting pressure on some of the biggest names in the industry.
a recent analysis from guru focus Demonstrates how the automaker’s example can set a new precedent for the auto industry, even as other companies still have huge debts to their lenders. While traditional automakers have relied largely on debt to produce and sell their capital-intensive products throughout their 100-year history, Tesla’s business model has enabled it to generate high levels of cash flow and at an unprecedented low cost for the industry. Got it with the loan.
guru focus Author Matthew Cobb details how Tesla’s debt is compared to America’s two largest automakers, GM and Ford, showing that both legacy manufacturers are swimming in debt. Meanwhile, Tesla could pay off the rest of its debt tomorrow if it wanted to.
Currently, Ford has total long-term debt of $140 billion, while GM follows close behind with $115 billion in the same category. Tesla, on the other hand, has just $5 billion in long-term debt, and plenty of cash to show for it. In fact, the company has $22 billion in free cash flow, which means that its cash minus debt leaves it with a surplus of $17 billion.
To be sure, the auto industry requires somewhat higher capital expenditures, mainly due to the expensive materials involved, as well as labor and equipment for production. Automakers also require top-notch research and development, which can be costly from an investment perspective.
Cobb attributes Tesla’s low debt to a few different things, first and foremost its great lineup of cars, innovative technology, and its overall dedication to renewable energy and sustainability. Through this and CEO Elon Musk’s ability to generate investor buzz on social media, Cobb explains how Tesla was able to go from a startup to a large corporation and the stock rising with new high valuations around 2020.
Once Tesla became highly valued, the company gained access to equity funding instead of typical debt financing. This allowed Tesla to keep debt low, as equity financing does not require the same path to repayment as debt financing. Since then Tesla has used its own equity funding to help keep its ongoing debt down, and specifically on debt originated before the company’s stock takeoff.
With a market capitalization of $548 billion (compared to $48.23 billion and $50.93 billion for Ford and GM, respectively), Tesla has demonstrated its prowess in financial management over the past 20 years. And with the emerging EV field gaining more ground than ever, it will be interesting to see how legacy automakers attempt to hold back Tesla’s dominance over the next 20 years.
Originally posted on EVANNEX. Written by Peter McGuthrie.
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