A Look Into Tesla's Debt

Over the past three months, shares of Tesla Inc. TSLA increased by 98.16%. Before having a look at the importance of debt, let's look at how much debt Tesla has.

Tesla's Debt

Based on Tesla’s financial statement as of April 30, 2020, long-term debt is at $10.67 billion and current debt is at $3.22 billion, amounting to $13.88 billion in total debt. Adjusted for $8.08 billion in cash-equivalents, the company's net debt is at $5.80 billion.

To understand the degree of financial leverage a company has, shareholders look at the debt ratio. Considering Tesla’s $37.25 billion in total assets, the debt-ratio is at 0.37. Generally speaking, a debt-ratio more than 1 means that a large portion of debt is funded by assets. As the debt-ratio increases, so the does the risk of defaulting on loans, if interest rates were to increase. Different industries have different thresholds of tolerance for debt-ratios. For example, a debt ratio of 25% might be higher for one industry, whereas normal for another.

Why Shareholders Look At Debt?

Debt is an important factor in the capital structure of a company, and can help it attain growth. Debt usually has a relatively lower financing cost than equity, which makes it an attractive option for executives.

However, due to interest-payment obligations, cash-flow of a company can be impacted. Having financial leverage also allows companies to use additional capital for business operations, allowing equity owners to retain excess profit, generated by the debt capital.