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Introduction of International Finance Assignment
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Tesla is an electric vehicle company based in the U.S. market, Tesla is founded by a group of technical engineers with the motive to drive vehicles with the help of electricity and reduce the consumption of fuels and natural resources. The company has an opinion to shift the consumer preferences with fast, fun and quicker options for transportation. Tesla is based in Austin and Texas, the company has made a profit of $3.47 billion in the year 2020. The company has captured the market share of electric vehicles for 23 % as well as 16 % for plug-in electric vehicles in 2020.
2. Section A: Recent development in international business environment
Development 1:
Climate change as well as recent shifts in the overall environment has resulted in the company amending its strategies on the sustainable usage of natural resources. At the same time, the electrical consumption of the vehicle has forced the company to decide on improved transportation by less dependence on fossil fuels. In the current scenario, the emission of CO2 is increasing and having a catastrophic impact on the environment. As opined by Kane (2018), the situation is quite alarming for the company. CO2 emissions have been doubled and are currently emitting 35 giga-tons per year. The company has a master plan to tackle the situation and is currently working on the development of environmentally-friendly vehicles.
Development 2:
The pandemic has hit hard in the electric vehicle market, the reduction of the registration of the vehicles sold under electric vehicle capacity can be encountered in the first half of 2020. On the other hand, after the first half of the 2020 electric vehicle market has commenced with the increment in the overall registration of the electric vehicle in the later part. The U.S market for the electric car industry has declined by 23% in the year 2020. The pandemic has affected the financial performance as well as the capacity of Tesla cars.
Effect of the development on the financial performance of TESLA
The previous year 2019 and 2020 has been difficult for the industries at the global level. The market in the U.S for electrical vehicles has declined due to fewer demands for the registration of electric cars. Despite the hindrances produced by the pandemic, the demand for Tesla cars is increasing. As stated by Melvin and Norris (2017), the company policies toward sustainable business are witnessed in the policies of the company through its decisions. The company has witnessed tremendous growth in the demand for cars. The company has a sales revenue of 31,356 million USD. The increased revenue has showcased the company's financial performance and increased its source of finances. The revenue of Tesla is 24, 578 in the year 2019 (tesla.com, 2022). The company has invested a wide number of shares in different investments and has acquired crypto currencies, which is also providing a company to manage the resources required and improve the production as well as development and growth of the company.
The effect of the increasing concern of climate change and emission of Co2 has been a serious issue. The company has taken it as a positive response and has responded favourably. Based on emerging challenges the company can increase its profit from the year 2019. The annual gross profit of Tesla has been increased from $4.069B 19 2018 to $6.63B 2020. Tesla is a powerful company and has dominated the US Market through its policies and investment strategies. The company has had a successful impact on the mind-sets of the youth and has delivered youth-friendly vehicles.
Revenue of Tesla
(Source: statista.com 2022)
The pandemic has slowed down the growth and development of the company at some level, however from the third quarter of the year 2020, the company revenue, as well as profitability, has been increased. The company can cope with the challenges given by the pandemic and climate change. The company's strong policy and technology-supported vehicles are blowing the demands as well as a desire for the change of the vehicle to a normal lifestyle.
Strategies for development effects
The company considers the needs and facilities of the consumer that are attracted and facilitated by the company policies in car manufacturing. As stated by Abdallah (2018), Tesla has strategies of making affordable cars as well as sports cars for the sports enthusiastic customers. At the same time, the company is also considering the manufacturing of less carbon emission electric vehicles. In addition, the company is also providing a service of Car purchases at a more affordable premium and many customers can buy the car without having any financial complexity. The company's strategies include the production of zero-emission power generation electric vehicles. It helps the company to overcome the situation of climate change and helps the company to manage its long term goals.
3. Section B: elements of finances
Sources of finances:
The company has policies of increasing equity holding and raising new debentures for managing financial resources. As opined by Borio et al. (2017), sources of finances are the important aspects for the company to manage its finances and provide continuous support for the various processes within the organization such as manufacturing, sales, advertising as well as other important functions of the company. Tesla follows the mix structure of finances and includes a wide range of debt as well as equity in its investment and capital (tesla.com, 2022).
Equity structure in Tesla: investors hold about 63% of the shares which shows the company has issued a wide number of shares and depend on the equity to a great extent. At the end of the financial year 2018, the company had $10.2 billion in its capital surplus. Out of the capital structure, only $4.9 billion were held as equity by the shareholders of the company. As per the annual reports of Tesla in the year 2019, the market cap of the company in August was $38.817 billion (imd.org, 2022).
equity extracts of Tesla Balance sheet
(Source: tesla.com 2022)
Debt structure in Tesla: the company is not so solid in its financial decisions, as the company believes in leverage in most of its activity for production of the electric cars. As per the annual report, the company is planning to raise $2 billion from long term debt. The company has $9.4 billion already in its books. Issuing and raising more dents will increase the structures of the financial resources of the company by debt. However, the company is facing the challenge of negative cash flow as the company does not retain excess cash and reinvest the available cash flow in the production of the vehicles to a great extent.
Debt extracts of Tesla Balance sheet
(Source: tesla.com 2022)
Gearing ratio:
|
Year
|
2020
|
2019
|
|
Non-current liabilities x 100
|
14170 x 100
|
15532 x 100
|
|
Non-current liabilities + total equity
|
14170+22225
|
15532 + 6618
|
|
38.93%
|
70.12%
|
Table 1: Gearing ratio
(Source: created by the learner)
The gearing ratio of Tesla shows that the company has high leverage in the year 2019 which is 70% on the other hand the gearing ratio has declined in the year 2020 which is 38.93%. It shows that the company has more investments in its equity as compared to debt in the year 2019. As stated by Dreher et al. (2019), however, the company is again looking for an increment in debt and focusing on the expansion of the debt restructuring in the coming years.
Capital structure theory and WACC:
The capital structure theory follows the principle of weighted average capital cost. As per the concept of the theory the more the structure of capital would increase the cost of the WACC will decrease. It means that if Tesla is looking for an expansion in the capital structure of the company. As opined by Franczak (2019), WACC would decline and provide high firm value to the company. The debt and equity structure highlight the company's capital structure, where the equity of the company has increased in the year 2020 as compared to 2019 by 40% approx.
Dividend policy:
Dividend policy is the structure of policy that differs from company to company. The policies are implemented in structuring the dividend provided to the company. The dividend structure is not fixed in the company. The company follows the tax preference dividend theory. In this scenario, the investors long term holding to get the preferences for a tax deduction and tax benefits. The current dividend yield would pay more in terms of long term holdings as well as investing in capital budget appreciating projects.
Dividend extracts of Tesla
(Source: tesla.com 2022)
Tesla has a strong grip on the market structure as well as the market share of the US economy. The company follows a dividend policy that can save its investors from high tax payments as well as provide security for frequent dividends. In the current scenario, the company has commenced dividend distribution from the year 2020(business-standard, 2022). As the company is more focused on the issue of debt securities, the company is frequent and consistent in a dividend distribution to its shareholders.
4. Section C: Financial performances analysis:
The accounting ratios are the metrics that measure the parameters of the financial condition of a company. In the current scenario, the following ratios have been selected to measure the performances of Tesla that return on capital employed, operating margin profit, gross margin profit, efficiencies ratio, receivable turnover day, current ratio and quick ratio.
In context, the profitability ratio return on capital employed has been analysed by the company. The company has a loss in 2019 as compared to the profitability in the year 2020. The negative result of the ROCE highlights that the company was suffering from losses in the year 2019 as compared to the profitability in the year 2020.
In context to Operating Profit Margin, it shows the amount of profit made by the company after paying its variable costs. The profit is estimated by subtracting the total costs from the total income of the company in an accounting year. As stated by Hasanaj and Kuqi (2019), It is important to collect information about the company's financial condition in terms of operational profit. The company has an operating profit of -0.28 approx. In the year 2019 on the other hand the operating profit has been increased to 6.32 in the year 2020 (refer to appendix). The company policies on the large as well as the development of sustainable vehicles have impacted the profit as well financial performance positively. The company has a better financial condition as compared to the year 2019.
In context to gross profit, the gross profit of the company is the profit that is calculated based on the cost of sales as well as revenue of the company in a financial year. As stated by Hasanaj and Kuqi (2019), Gross profit can be calculated by subtracting all the costs and expenses that are incurred to manufacture a product in the company by the total sales that are received from the sale of these products. The company has a gross profit of 16.55 % in the year 2019 which further increased to 21.023% in the year 2020. The company has performed well in the financial year 2020 (refer to appendix). The company's decision to include more equity shares as compared to capital issues in 2019 has made the company able to increase its profitability within a year.
In context to Inventory Turnover Days, the inventory turnover ratio highlights the frequency in which a company replaces its inventory through sales or any other capacity in the given period. The company can divide the period in the form of days to calculate the days. As stated by Karkac?er and Erta (2017), Resulted days are utilized by the company to sell the inventory within that period. A low ITD ratio indicated that sales are poor and not able to sell the inventory produced in the entire year.
Consequently, there is an increase in overstocked inventory in the financial year. It is also vital for the company to manage a low ratio to perform financially well in a year. The ITD estimated for the year 2019 of Tesla is 63 days approx. On the other hand, the inventory days calculated for the year 2020 is 60.1 [refer to appendix]. The inventory days have decreased as compared to the estimation in the year 2019. Here the low inventory days in the year 2020 highlights that the company can clear up the inventory in less time. The management has been able to clear the inventory as well as get the stick sold in less time as compared to the year 2019.
In the context of Receivable Turnover Days, the turnover days in terms of receivable is calculated to estimate the total number of days that takes a customer to repay its dues on an average basis. The receivables that are sold based on credit are considered for the estimation of RTD. As stated by Pelekh et al. (2020), it is estimated by dividing the total receivables by total revenue and multipliers by the number of days in the financial year. A high receivables turnover days indicates that it takes a long time for the customers to pay the credit that they have taken for purchases of goods from the company. The RTD of the company was 19.66 in the year 2019 while in 2020 it was 21.82. The company has a high RTD that highlights that the debtors of the company are taking longer to repay the debts to the company. This is quite a challenge as the company sells the goods on credit.
In context to the current ratio, the current ratio analyses the capability of the company to pay its short term loans and obligations within one year. As stated by Prodanova et al. (2019), the current ratio is the best source of information to gather the information on the liquidity ratio of the company. The current ratio of the company in the year 2019 is 1.13 while in the year 2020 it is 1.87 [refer to appendix].
There is an increase in the liquidity ratio of the company that further shows that the company is effectively paying off its dues and short term obligations in the year 2020 as compared to its liquidity obligation in the year 2019. The higher ratio indicated the higher possibility of the company to repay its obligations.
In context to the Quick ratio, this ratio is calculated to measure the short term obligations of the company similar to the current ratio. As stated by Wild (2019), the main difference between the current ratio and the quick ratio is that the quick ratio does it included the inventory. The quick ratio in the year is 2019 approx. 0.13 while in the year 2020 it is 0.87. The company does not have a healthy quick ratio however the company can repay its obligations more effectively in 2020 as compared to its short term obligation in the year 2019 [refer to appendix].
5. Conclusion
Tesla is a renowned company and has a strong grip on the market share of the USA in the industry of electric vehicles. The company has managed its resources very effectively and impacted a wide population. The company has launched its electric vehicle with the motive to improve the business effects on the environment and reduce the emissions of hazardous gasses. Tesla has emerged as a strong competitor for its rivals. The company has continuous and accelerating growth in the profit and revenue of the company. Despite pandemic and another negative international business impact the company profit, as well as growth, is increasing and expected to grow in future as well.
References
Books
Kane, D.R., 2018. Principles of international finance. U.K: Routledge.
Melvin, M. and Norrbin, S., (2017). International money and finance. U.S: Academic Press.
Robinson, T.R., 2020. International financial statement analysis. U.S: John Wiley & Sons.
Journals
Abdallah, S., (2018). External auditor type, discretionary accruals and investors’ reactions. Journal of Accounting in Emerging Economies.
Borio, C., Gambacorta, L. and Hofmann, B., (2017). The influence of monetary policy on bank profitability. International Finance, 20(1), pp.48-63.
Dreher, A., Lang, V.F. and Richert, K., (2019). The political economy of International Finance Corporation lending. Journal of Development Economics, 140, pp.242-254.
Franczak, I., (2019). The relations between the quality of financial statements and corporate governance. International Journal of Management and Economics, 55(2), pp.118-126.
Hasanaj, P. and Kuqi, B., (2019). Analysis of financial statements. Humanities and Social Science Research, 2(2), pp.p17-p17.
Karkac?er, A. and Erta?, F.C., (2017). Independent auditing effect on investment decisions of institutional investors. Accounting and Management Information Systems, 16(3), pp.297-319.
Pelekh, U., Khocha, N. and Holovchak, H., (2020). Financial statements as a management tool. Management Science Letters, 10(1), pp.197-208.
Prodanova, N.A., Trofimova, L.B., Adamenko, A.A., Erzinkyan, E.A., Savina, N.V. and Korshunova, L.N., (2019). Methodology for assessing control in the formation of financial statements of a consolidated business. International Journal of Recent Technology and Engineering, 8(1), pp.2696-2702.
Rudhani, L.H., Ismajli, H. and Mustafa, A., (2017). The importance of the audited financial statement in attracting foreign investors in private sector in Kosovo. Baltic Journal of Real Estate Economics and Construction Management, 5(1), pp.118-136.
Wild, J., (2019). Financial Accounting: Information for Decisions, 9e.
Websites
business-standard (2022). About Interanational Tesla business Available from: https://www.business-standard.com/article/international/tesla-aims-to-complete-cybertruck-development-this-year-elon-musk-122032401167_1.html [Accessed on: March 28, 200]
imd.org (2022). About twwwesla sustainable business Available from: https://www.imd.org/research-knowledge/articles/tesla-becomes-a-model-for-sustainable-leadership-david-and-goliath-revisited/ [Accessed on: March 28, 200]
tesla.com (2022). About Tesla available from: https://www.tesla.com/ [Accessed on: March 28, 200]
