This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Tesla's 'BS to Book' Ratio Says It All

NEW YORK ( TheStreet) -- It's lonely being a Tesla Motors (TSLA - Get Report) skeptic.

After all, the mainstream media gushes over the styling, performance and unlimited electric coolness of the new Model S.

I can't help myself. I'm a bean counter and a lawyer, and I've spent too many years advising start-up companies on corporate finance and business development issues to overlook trivialities like financial condition.

For companies like Tesla with a long history of losses, the first number I focus on is working capital. If a company can't cover its expected losses for the next year and make all required capital investments with available funds, it will almost certainly be forced to seek additional financing. That's tough in a turbulent market where investors wear brass knuckles to price negotiations.

As of June 30, Tesla's working capital was $30.6 million. Unfortunately, Tesla loses about $30 million a month, which means its working capital went negative at the beginning of August and is deteriorating with each passing day. While it was easy for new investors to discount execution risks in the summers of 2010 and 2011, they're harder to ignore in the midst of a long-anticipated product launch that saw the 100th Model S roll off the line Aug. 15.

The second number I focus on is the difference between a company's market capitalization and its book value, frequently referred to as blue-sky. Public companies normally trade at a premium to their book value because intangible assets like intellectual property, human resources, customer relationships and the like don't have a balance sheet value.

Some blue-sky premium is normal, but when the premium gets too high, it's a red flag. To simplify comparisons among companies, I like to calculate a ratio between blue-sky and book value. As a general rule, I've found that "BS to book" ratios below 2 are healthy and ratios above 10 are dangerous. Apple, for example, has a BS to book ratio of 4.6, while Amazon's is 13.5.

As of June, Tesla's book value was $62.2 million and its market capitalization was $3.7 billion. That gave Tesla an eye-watering BS to book ratio of 60. As I noted earlier, Tesla loses about $30 million a month, so its stockholders equity will go negative around the end of August and drive its BS to book ratio, in the words of Buzz Lightyear, to infinity ... and beyond.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
TSLA $240.76 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
YHOO $36.60 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs