Hello, and welcome to
today's case study entitled
'Tesla: Using Cash Flow
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
Amazon was a company that reported negative
earnings for years early in the 2000s, right?
They're generally low
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
Now, when we're
forecasting cash flows,