Question

1. You have to project Tesla over the next 10 years, what are the different variables of which you need to think and which will be the most challenging (both balance sheet and income statement)? (20 points)

Answer 1

Tesla is electronic automaker which is United States based but it has manufacturing plants outside United States too, so it has a potential to grow as it is related to innovative technology but there are certain factors that can hamper its growth in the long run.while doing analysis for Tesla, I would be looking to factor in, these factors-

A. Growth rate-growth rate for Tesla is phenomenal for the current scenario but it would not be easy to sustain this growth rates in the long run as it will grow into a mature company.

B. Large amount of debt in total capital structure-Tesla is loaded with large amount of debt in overall capital structure as it is is highly debt oriented company which is running on losses.

C. Credit risk-there is a large amount of credit risk associated with Tesla as it has a pile of debt and it can crumble in the adverse economic scenario when it will not be able to generate enough revenues to meet its interest cost.

D. Limited scope of diversification as it is into the electronic segment and its competitive edge has already been discounted so, there are no further triggers for its exceptional valuation.

E. Centralised operations-all the operations of Tesla are conducted by its chief executive officer who is Elon Musk and he takes the majority of decisions and he owns the company as well so this can lead to huge dependency on one person and it is a highly centralised approach which can be devastating at adverse situations.

I think the higher amount of debt is the most challenging among all factors for Tesla, because when Tesla would be growing into a mature company and it will still be having a lot of debt, then the level of growth would not be that high to compensate the level of interest expenditure at the time of adverse economic scenarios.