Diagnose the performance of TESLA

Diagnose the performance of TESLA

You will calculate (or find) the firm’s RoA for at least three years. You will then calculate other data points (i.e., Return on Sales, Asset productivity, CoGS/ Sales, etc.). The idea is to diagnose the problem that is either currently confronting or might confront the given firm in the future. What is the point of this diagnosis?

This diagnosis helps companies take corrective action. For instance, the RoA should ideally increase over the three-year period. (I do not know but let us say that it did increase in the given company’s case.) You will then diagnose which of the two – Return on Sales or Asset productivity – contributed more to the growth in RoA over the three-year period. Let us say that the RoS declined while the Asset productivity increased. This gives you a clue that the RoS is not going in the desired direction. You will then further disaggregate the RoS into various components to find out which of the components (or activities) are causing the problem. It is always better to simultaneously disaggregate RoS and Asset Productivity even if one of them does not seem problematic.

After that,  disaggregate the RoA into two components, another method referred to as the “Dupont formula” breaks up the RoE into three components. (Please do not disaggregate the ROE. )

REFERENCES: https://www.macrotrends.net/stocks/charts/TSLA/tesla/roe

Answer Guide

To diagnose the financial health of a company, let’s use the Return on Assets (RoA) as the starting point and then calculate other relevant financial ratios for a Telsa company over a three-year period. We will use these ratios to identify potential issues and their root causes.

Return on Assets (RoA) Calculation: RoA is calculated as Net Income divided by Total Assets.

• Year 1 RoA = Year 1 Net Income / Year 1 Total Assets
• Year 2 RoA = Year 2 Net Income / Year 2 Total Assets
• Year 3 RoA = Year 3 Net Income / Year 3 Total Assets

Now, let’s calculate some additional ratios:

1. Return on Sales (RoS): RoS is calculated as Net Income divided by Total Sales (Revenue).

• Year 1 RoS = Year 1 Net Income / Year 1 Total Sales
• Year 2 RoS = Year 2 Net Income / Year 2 Total Sales
• Year 3 RoS = Year 3 Net Income / Year 3 Total Sales

2. Asset Productivity: Asset Productivity is calculated as Total Sales divided by Total Assets.

• Year 1 Asset Productivity = Year 1 Total Sales / Year 1 Total Assets
• Year 2 Asset Productivity = Year 2 Total Sales / Year 2 Total Assets
• Year 3 Asset Productivity = Year 3 Total Sales / Year 3 Total Assets

3. Cost of Goods Sold (CoGS) to Sales Ratio: CoGS to Sales Ratio is calculated as CoGS divided by Total Sales.

• Year 1 CoGS/Sales Ratio = Year 1 CoGS / Year 1 Total Sales
• Year 2 CoGS/Sales Ratio = Year 2 CoGS / Year 2 Total Sales
• Year 3 CoGS/Sales Ratio = Year 3 CoGS / Year 3 Total Sales

Diagnosing Potential Issues: Now, let’s analyze the data to diagnose potential issues:

• If RoA increased over the three-year period, it suggests improved asset utilization or profitability.
• To determine which of the two, RoS or Asset Productivity, contributed more to the growth in RoA, compare the changes in RoS and Asset Productivity. If RoS declined while Asset Productivity increased, it implies that the company is becoming more efficient in utilizing its assets but may be facing profitability challenges.
• Further disaggregate RoS into its components (e.g., operating expenses, interest expenses, taxes) to identify which specific activities or expenses are causing the RoS decline.

The point of this diagnosis is to pinpoint areas of concern within the company’s financial performance. By identifying whether the issue lies in profitability (RoS) or asset efficiency (Asset Productivity), the company can then take targeted corrective actions. Additionally, dissecting RoS into its components helps in pinpointing the exact areas that need improvement, allowing for more precise decision-making.

However, please note that specific actions taken by the company will depend on the actual financial data and the industry in which it operates. The analysis provided here is a general framework for diagnosing financial performance.