5-2 Project Two Milestone Comparison Analysis - Copy PDF

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5-2 Project Two Milestone: Comparison Analysis

Southern New Hampshire University FIN-320 Principles of Finance

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Tesla is the world's leading electric car manufacturer. Its revenue in 2020 was 31.54 billion dollars ("TSLA," n.d.). This paper aims art analyzing the ratios for Tesla inc Tesla Incorporated Ratios Item Working capital: Current ratio: Debt ratio: Debt/equity ratio: Earnings per share: Price/earnings ratio: Total asset turnover ratio: Financial leverage: Net profit margin: Return on assets: Return on equity: Table 1: Source: Yahoo finance

2020-12-31 14.7 Billion 1.88 0.27 1.26 0.64 1127.27 0.7 1.31 2.19% 2.0% 4.8%

2019-12-31 12.5 Billion 1.13 0.28 3.60 -0.98 −90.3 0.8 4.06 -2.67% −2.4% −15.1%

Do the results indicate the business is financially healthy or financially unhealthy? Which results indicate this? The ratios above showed the business was healthy in 2020 but was struggling in 2019. The current ratio is the business's ability to pay short-term debts. In 2019 and 2020, Tesla has had a current ratio of more than one, increasing, meaning they can cover their short-term debts. A value below 0 is not suitable as it means they cannot cover short-term debts. The debt ratio measures a company's leverage. Investors typically prefer a value less than one because it shows the company has more assets than liabilities. Tesla has had a lower Debt ratio, and thus, it has more assets than liabilities. The debt to equity ratio shows how the company is financing its operation through debt or own funds. Values below one mean the company is funding more of its operations through

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shareholder equity, more than one is more with debt. Companies usually aim for values between 1 - 1.5. In 2019 tesla had a higher value but improved in 2020. In 2019 Tesla was losing money as its earnings per share were negative, but in 2020, the earnings per share were 0.64 dollars. The price to earning assists investors know the market value of a stock compared to companies earnings. The same with earnings per share, Tesla had a negative value in 2019 but improved in 2020. The asset turnover was 0.7 in 2020, dropping from 2020, in generating revenue from assets. What might be the cause(s) of the business’s financial success or failure? Four common issues that lead to financial failure of a business are: Financial Hurdles – According to Horton, (2021), “owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that can quickly put a small business out of operation.” Ignorance of the finances required to successfully run the business by the owner is a common failure point for businesses. Inadequate Management – Horton (2021) states, “Another common reason small businesses fail is a lack of business acumen on the part of the management team or business owner.” To succeed a busines requires more than than just money. A business must have a strong management team, the team must understand the needs and wants of their customers and employees.

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Ineffective Business Plannning – Businesses without a plan will fail. This is the important step when creating a business, the plan should contain the business model, and potential revenue streams. Marketing – Horton (2021) states, “Businesses that do not understand these aspects of sound marketing strategies are more likely to fail than companies that take the time to create and implement cost-effective, successful campaigns.” Failure to understand the target audienece for the product. Is more information needed to determine the business’s financial health? If so, which pieces of information might still be needed? The items to identify business health are determined are the balance sheet, income statement, and cash flow statement. Stobierski, (2020) states, “Financial ratios help you make sense of the numbers presented in financial statements, and are powerful tools for determining the overall financial health of your company.” To determine a firm’s liquidity, profitability, solvency, and profitability a financial ratio analysis must be conducted. The financial ratio analysis should contain the gross profit the net profit margin, current ratio, debt to equity raio, inventory turnover, total asset turnover, return on equity, and return on assets. The financial ratio analysis should be conducted for several quarters and compared to the financial ratios of the firm’s competitors to help analyze whether the firm is passing or losing to its competitors. One form that can help analyze financial health are the firm’s tax forms. Tax forms can help a buyer analyze whether a firm is making or losing money, but they are not required to conduct a financial ratio analysis. With the documents that were previousily described a firm’s liquidity, profitability, solvency, and profitability can be determined.

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Short-Term Financing To receive short term finanacing a firm will need to show its liquidity, profitability, solvency, and profitability. Finance institutions use the debt-to-equity ratio (D/E) to help them make finance decisions. The D/E ratio is used to measure how much of a firm’s debt come from debt rather than through the firm’s own funds. In December 2019 Teslas D/E ratios was 3.6, while in December of 2020 its D/E was 1.2. A higher D/E ratio may be indicative of finanaical issues in the future that may lead to bankruptcy. A lower D/E ratio can indicate that the firm is taking on debt to lower its D/E ratio.

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References

Horton, M. (2021, April 1). The 4 Most Common Reasons a Small Business Fails. Investopedia. https://www.investopedia.com/articles/personal-finance/120815/4-most-common-reasonssmall-business-fails.asp.

Stobierski, T. (2020, June 18). How to determine the financial health of your Company. https://online.hbs.edu/blog/post/how-to-determine-the-financial-health-of-a-company.

TSLA. (n.d.). Yahoo Finance. https://finance.yahoo.com/quote/TSLA/...