Financial Analysis: Tesla's Free Cash Flow

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Financial Analysis
Free Cash Flow The free cash flow (FCF) is the cash flow actually available for distribution to all investors, including creditors and stockholders, after an organization has made all investments in fixed assets and working capital necessary to sustain ongoing operations. (Brigham & Ehrnhardt, 2014, p. 11).
Free Cash Flow = Net Operating Profit After Taxes (NOPAT) - Net Investment in Operating Capital Equation 1. Free Cash Flow

“Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it 's tough to develop new products, make acquisitions, pay dividends and reduce debt. Some believe that Wall Street focuses myopically on earnings while ignoring the …show more content…

Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm 's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up. Tesla’s Free Cash Flow for 2014 was -2,086,054 thousand, a decrease of 2,130,600 thousand from the prior year. Shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt levels. Even worse, a company without enough FCF may not have the liquidity to stay in business. (Free Cash Flow, 2015). Based on the significant decrease in FCF from 2013 to 2014, it is not a good indication that Tesla will be able to sustain ongoing …show more content…

Free Cash Flow Comparison

Over the last 5 years, Tesla’s FCF has been consistently in the negative, with the exception of 2013. General Motors reported a FCF of 1,162 thousand and has increased consistently since 2010, while Toyota has also faced some volatility with negative FCF every year except 2013.

Economic Value Added

Economic Value Added (EVA) is a method used to measure a firm’s true profitability. EVA is found by taking a firm’s after-tax operating profit and subtracting the annual cost of all the capital a firm uses. If the firm generates a positive EVA, its management has created value for its shareholders. If the EVA is negative, management has failed to increase shareholder value. (Brigham & Ehrnhardt, 2014, p. 75).
EVA promotes the idea that a company is only truly profitable when it creates wealth for its owners and shareholders, and is a better indicator than net income. EVA also includes balance sheet numbers in its calculations and encourages managers to take assets and liabilities into account as well as revenue and expenses when making decisions on behalf of the company. (EVA, Investopedia). The goal of EVA is to determine whether the company has generated a greater return on a capital investment than it could have received by investing the money elsewhere. Economic Value Added, or Economic

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