1 Red Flag on Tesla’s Balance Sheet, Made Even Worse By the Red Flag on Its Cash Flow Statement

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If you haven't heard of Tesla Inc. (NASDAQ: TSLA), you've been living under a rock. The electric-auto maker, and to a much lesser extent solar power company, has been making headlines for years. Having a celebrity CEO like Elon Musk helps, of course. But so does producing sexy high-end cars that are leading the world's automakers into the electric age. Yet some of the numbers behind this facade aren't very good. Here are the red flags you need to be watching on the company's balance sheet and cash flow statement today.

Digging in

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This isn't a commentary on Tesla's cars, which are pretty nice, or Elon Musk's view of the world's future, which is clearly visionary. Tesla really is helping to push us all in a new direction. However, that alone doesn't make the company a great investment, particularly after a massive 50% year-to-date gain. Impressively, that gain includes a drop of around 15% from midyear highs.

But what's backing that gain? It's not earnings, since Tesla has turned a profit in only one quarter since it became public in mid-2010. The real bullish news centers around the products the company is making, or plans to make, and revenues. The top line has, indeed, expanded at an impressive clip, going from $100 million when Tesla IPOed to roughly $7 billion just six years later. Revenues look set to increase to well over $10 billion in 2017.

This isn't actually a surprising dichotomy when you consider that Tesla is still building its business. Starting an automaker from the ground up is not just audacious; it's costly. The expectation is that once production ramps up and capital spending winds down, Tesla's revenue will start to flow through to the bottom line. But there's a cost here.

No end to the spend

For example, long-term debt on the balance sheet has exploded. That's red flag No. 1 in a big way. In 2010, Tesla had less than $100 million worth of long-term debt. Today that figure stands at nearly $9.6 billion. In fact, debt levels are up a massive 60% since the start of 2017 alone. Tesla is clearly leaning heavily on the capital markets to fund its growth. Long-term debt now stands at around two-thirds of its capital structure.

TSLA Total Long Term Debt (Quarterly) data by YCharts

Automaking is a capital-intensive industry, so having a lot of debt isn't a huge issue in and of itself. For example, long-term debt is around 75% of Ford's (NYSE: F) capital structure and 60% of General Motors' (NYSE: GM) structure. What makes it problematic is that Tesla isn't profitable, while Ford and GM are soundly in the black. But earnings aren't the right metric to look at since they are an accounting metric; cash flow is the real lifeblood of a business. You can bleed red ink for years as long as you generate enough cash flow to keep paying the bills.

And that's where red flag No. 2 pops up. A quick look at Tesla's cash flow statement shows that it's burning through cash at a rapid clip. For example, through the first nine months of 2017, the company's investing activities ate up $3.5 billion worth of cash. Running the business required another $500 million. Tesla needs a lot of money to keep the lights on...That's a worrying trend when you note that Tesla only had $3.5 billion in cash on the balance sheet at the end of the third quarter. The increase in debt was what allowed the company to keep spending.

The counter argument, of course, is that Tesla is building its business for the future. In fact, if the company can hit its long-term goal of producing 10,000 Model 3s a week (and, of course, getting them sold), it would add over $18 billion in revenues to its top line. That would represent a huge top-line increase, but it's a long-term story since the company has had difficulty getting the production number up to even 1,000.

And with both debt levels and cash needs at such high levels, Tesla could quickly find itself in a financial bind before it reaches its lofty goals should the capital markets dry up. What would make that happen? A market downturn might do it, but so could worried investors suddenly becoming unwilling to provide capital to a money-losing automaker that has yet to turn a full-year profit. That's not an unrealistic expectation given that the company's recently issued junk bonds have been trading below par, suggesting that bond investors already have some concerns about Tesla's debt levels. At the very least, the weak bond pricing suggests that future financing rounds will come at a higher cost. Tesla is really reliant on the generosity of the capital markets to keep its business going right now and Wall Street can be quite fickle.

TSLA Free Cash Flow (TTM) data by YCharts

To make matters worse, Musk's ambitions continue to expand. A giant battery plant and a new car model are old news at this point -- even though the Model 3 has yet to achieve its production goals. The next big spend will come with the planned production of a semi-truck. Big new projects captivate investors, but they require money to get done. I have no doubt the semi is an incredible vehicle...but I'm not convinced Tesla will be able to get the cash it needs to build it.

Follow the money

Tesla is way too risky an investment for my taste, which tends toward boring, dividend-paying stocks. However, the top-line growth and story at Tesla are, indeed, enticing. But don't get so caught up in that story that you forget to look deeper into the financials. Right now, there are red flags waving on the balance sheet and cash flow statement. If Tesla has any problems accessing the capital markets, it could be forced to dial back its ambitions in a big way. That's a move that would likely take a material toll on the company's stock price.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ford and Tesla. The Motley Fool has a disclosure policy.