Extended-form Case Study

Tesla: using cash flow forecasting techniques

Published on March 30, 2022   10 min

A selection of talks on Finance, Accounting & Economics

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Hello, and welcome to today's case study entitled 'Tesla: Using Cash Flow Forecasting Techniques'. I'm Professor Michael McDonald. I'm a professor of finance at Fairfield University in Fairfield, Connecticut. Today, I'd like to talk to you about Tesla as a lens to understand the issue of forecasting in a financial setting. Let's get started, shall we?
Here's a chart of Tesla over the course of 2019 and into 2020, what we see is that Tesla stock price has gone from $200 a share at that time to over $800 per share. The stock is up 400 percent during that time period of 2019 - 2020. Tesla's earnings were negative 87 cents per share. What's going on here? Have we lost our minds? Why is Tesla's stock up 400 percent during this period if the company lost money? What do you think?
Now, what we really need to focus on when it comes to Tesla is not just their earnings which reflect accounting rules, but rather their cash flow. To parallel with another company, Amazon. Amazon was a company that reported negative earnings for years early in the 2000s, right? They're generally low negative earnings, but the earnings were not particularly impressive or anything of that sort. However, Amazon was throwing off significant positive free cash flow. That helped to support its stock and ultimately led the company to be very profitable, even on a gap earnings basis. The point is that gap earnings don't always reflect the underlying value for the company. Is Tesla like this? I don't know. What we have to do is examine the company's statement of cash flows and look at how the company is doing overall. The statement of cash flows reports the amount of cash it's collected and paid out by the company in three different categories:. Operating activities, investing activities and financing activities for a given period of time. In essence, this is telling us how the company receives its cash, how it uses its cash, etc. We usually think about the statement of cash flows as complementary to the income statement and that's true, but it can be just as important and critical to look at. I don't want you to walk away thinking the statement of cash flows is unimportant and that if we look at the income statement, we don't need to review the statement of cash flows. That would not be the right conclusion. Now, when we're forecasting cash flows,

Tesla: using cash flow forecasting techniques

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