Three years ago, the situation looked dire for Tesla (NASDAQ:TSLA) with delays in production, a limited financial position, and rising skepticism in the media. So it's definitely time to revisit the company after a roaring 2020 that saw the stock go up manyfold & the business secure its future with three separate capital raises. Tesla still has a fair bit of debt, but the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Tesla's Debt?

The image below, which you can click on for greater detail, shows that Tesla had debt of US$10.3b at the end of December 2020, a reduction from US$11.8b over a year. However, its balance sheet shows it holds US$19.4b in cash, so it actually has US$9.06b net cash.

A Look At Tesla's Liabilities

According to the last reported balance sheet, Tesla had liabilities of US$14.2b due within 12 months, and liabilities of US$14.2b due beyond 12 months. On the other hand, it had cash of US$19.4b and US$1.90b worth of receivables due within a year. So its liabilities total US$7.18b more than the combination of its cash and short-term receivables.

Having regard to Tesla's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$610.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Tesla also has more cash than debt, so we're pretty confident it can manage its debt safely.

Pleasingly, Tesla is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 2,108% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tesla's ability to maintain a healthy balance sheet going forward.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tesla has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Tesla actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Tesla has US$9.06b in net cash. So is Tesla's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But for Tesla in particular, bigger picture is ultimately a lot more important. Tesla has ambitious goals, the stock is priced like it's going to achieve them, but it's not clear to us that the company is in a position to get there. You can read more about Tesla from our analyst Michael Paige, here.

Or, if you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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