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

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

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