Ratio Analysis (Historical) Liquidity Ratio Current ratio: The current ratio measures a companys ability to meet the

shortterm financial obligations, i.e. meet the short-term debt and payable payments with its short-term assets. It shows how flexible a company is, to meet its day-to-day operating expenses. Current ratio is calculated as (current assets) / (current liabilities). The higher the ratio, more is the liquidity of a company and a value under 1 implies that it wont be able to meet the short-term obligations and would have to explore other means of financing. The year ending 2010 showed much improvement in the current ratio of Telsa Motors. The current ratios value increased from 1.75 to 2.76 from 2009 to 2010 showing a significant rise in the companys short-term liquidity and efficiency. Although, this value decreased in the year ending 2011 to 1.97, this still shows that the company is maintaining it liquidity and would be able to meet the short-term obligations. For the year ending 2012, Telsa Motors suffers by a massive decrease in its current ratio going down to .97 from 1.97. This implies that Telsa Motors would have problems in paying off its current liabilities from its current assets and would have to resort to other means of financing to meet this liquidity problem. These additional measures can further cause liquidity and solvency problems if not managed well. This large decrease in the current ratio can be either due to an increase in its ST liabilities or a decrease in its ST assets, or both. An analysis of the companys balance sheet shows; A much higher increase in CA than CL from the year 2009 to 2010. The addition of restricted cash and increase of inventory in CA were the main increments of CA. The value of increment of inventory itself covers the increase in liabilities between the two years. The restricted cash that company added in its CA in the year 2010 comes from cash received from its IPO net of DOE loan facility payment (under contract), causing the current ratio in 2010 to jump to 2.76. 124% increase in liabilities from the year 2010 to 2011 as compared to a 53% increase in Telsa Motors CA reduced the current ratio to 1.97, even though this value is safe one for the company showing that it would be able to meet the ST obligations. The current ratio value of .97 in the year ending 2012 is worrisome for the company as a value lower than 1 implies that the firms CL are greater than its CA and is facing problems in maintaining financial liquidity for its day-today requirements. The increase of $347,796,000 in liabilities in just one year is largely due to the massive rise in the accounts payable of the firm of $247,241,000 followed by an increment in long-term debt payable within

one year. Even ignoring the latter increase, this large escalation of accounts payable is problematic for Telsa Motors. According to the 10K, this increase in accounts payable was primarily due to growth of the business and adjustments and corrections made from last year to the current years values. To improve the current ratio, Telso motors would have to at first reduce the amount of payables, increase its cash and cash equivalents for a current ratio greater than 1.

Cash Ratio: Cash ratio is the ratio of a companys total cash and cash equivalents to its current liabilities. It measures how quickly can a company pay its ST debt obligations using its most liquid resource, i.e. cash. It is used by creditors to assess whether a company should be provided with debt and how much. This ratio is just a factor in determining a companys liquidity rather than its value. Higher the ratio, the better it is and a value of less than 1 would mean that the company would have to use other sources than just cash for payments of its ST liabilities. The ratio decreased from the year 2009 to year ending 2010, but the decrease was only to 1.16 from 1.21, this not being a source of worry. The year ending 2011 saw a good rise in the cash ratio for Telsa Motors to 1.47 as there was a significant increase in the cash and cash equivalents showing that the company can still meet the ST debt obligations using only cash. The year ending 2012 saw this ratio depreciate due to the very large increase in the current liabilities due to the reasons mentioned above. Along with this increase, the value of cash and cash equivalents also decreased from the year 2011 causing the reduction of the cash ratio. This low ratio of .37 of the year 2012 means that Telsa Motors would have to use its receivables and inventory to make ST payments. If with these additional assets the company were not able to pay off its ST liabilities, it would also be gather other sources of financing. Debt-to-assets ratio 2012 - 452336/1114190=0,41 2011 - 276251/713448=0,39 2010 - 71828/386082= 0,19 Debt-to-asset ratio measures a companys financial risk; the leverage used and its financial stability. It shows how much of the assets of a company are funded through debt. The total debt used is both, ST and LT, with the total assets, tangible and intangible, as the denominator. A debt ratio of less than 1 implies that a company would have to use only its assets to pay off any debt. Thus, higher the ratio, greater the default risk which reduces the borrowing limit of a company, harming the long term financial stability and flexibility. Also, with a higher ratio, any new debt that a company is issued would have higher debt servicing cost.

From 2010 to 2012, the debt-to-asset ratio of Tesla Motors although increasing, is less than 1 meaning that the companys long term financial position is stable and it can meet its long term debt obligations and payments along with any unforeseen financial instability. Doing a historical analysis, Tesla Motors was more financially stable in 2010 than in 2012. Over the two years the debt of Tesla Motors increased by 530%, of which $204.4 and $188.8 million was received in 2011 and 2012 respectively as per the DOE loan facilities contract whereas the increase in its total assets was 189%. Even though both, debt and assets increased over the two years, the rise in Tesla Motors debt is much higher resulting in a depreciation of the ratio but this rise in the ratio is not harmful for the company because the loan received from DOE Loan Facility is for the production of their Model S and the Tesla Factory. The ratio being .41 in the year ending 2012, if Tesla Motors wants to raise new financing, the creditors would easily issue them debt because the company still has the ability to increase its leverage by $661,854,000 keeping the total assets constant to the EOY 2012 balance and still meet its long term debt payment obligations in which case all of the assets on the balance sheet would be owed to creditors. 452336/124700=3,63 276251/224045=1,23 71828/207048=0,35 Debt-to-equity ratio

Debt-to-equity ratio is another measure of a companys long term financial leverage and stability (solvency ratio) and provides a risk measure to a companys current and prospective creditors as well. For the calculation of the debt-to-equity ratio, the total debt of a company is divided by the total shareholder equity. It indicates how much a company is financing its growth by raising debt. A high ratio can have a considerable detrimental effect on a companys earnings in the form of high debt servicing costs. Although with a higher ratio, the company would be less like to be issued any new debt but if any new debt is issued, interest expense would be very high. If at this time this outside source of financing is halted, it would prove to be very problematic for a company to continue its business activities. Thus it is very important that a company manages its debt relative to its equity and business activities keeping this ratio low. The benchmark value of the debt-to-equity ratio varies from industry to industry and in the auto manufacturing industry, as is in our case, the ratio tends to be above 2. In our historical analysis of Tesla Motors debtto-equity ratio, we will use 2 as the benchmark, lower being stable and a higher ratio stating financial instability. For Tesla Motors, the value of debt-to-equity ratio for the years 2010 and 2011 although increasing, still represent financial stability. In 2012, the ratio goes to a very high value of 3.63 from 1.23 in 2011. The value for 2012 is above the industry benchmark indicating financial instability for Tesla Motors. This suggests that Tesla Motors would face difficulty in paying off the debt if the payments are to made under chapter 7, and in case of chapter 11, the restructured payments to debtors would be over a very high cost. Also with the 2012 value, in case of liquidation, the

equity holders wont receive any payments on their ownership share of the company. The increase in debt in year 2011 and 2012 is explained above in the debt-to-assets ratio. High debt can be stated as the main reason for such an elevated debt-to-equity ratio value for year ending 2012, but alongside, the equity in 2012 decreased by 45%, causing a simultaneous devaluation in the debt-to-equity ratio. This lowering of total shareholder equity in 2012 was because of the accumulation of deficit from the convertible preferred stock and shareholders equity. Till 2011, the total shareholder equity increased per year even net of the accumulated deficit but in 2012, when Tesla Motors faced an unrealized loss of $396,213,000 on its short-term marketable securities, the accumulated deficit increased to an amount to offset the overall inflow from issuance of stock decreasing the equity by about a $100 million to $124.7 million in 2012 from $224 million in 2011. Financial Leverage Interest Coverage Interest coverage ratio is a representation of a companys ability to pay interest expense using its EBIT on the outstanding debt. It measures the number of times a company could make the interest payments on its debt with its EBIT and is calculated as interest expense / EBIT. Tesla Motors is very able to make interest payments as its has a growing EBIT over time and the ratio increases from 148 times to 5,848 times from 2010 to 2011 implying stability and very high margin of safety. Even though this value decreased to 1,552 times in the year 2012 but it still implies that Tesla Motors can borrow large amounts of money as it is would be able to meet the annual interest payments of not anything else.