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.

Last week, the green press quoted Tesla CEO Elon Musk as telling the National Clean Energy Summit in Las Vegas: "The challenge that Tesla faces over the next few months is scaling production enough to achieve a certain gross margin on our product so we can be cash flow positive. That's extremely important. If we're unable to do that, we'll enter the graveyard with all the other car company startups of the last 90 years."

When I read the Musk quote and thought back to the "cash low point" discussions in the second-quarter conference call, I couldn't help but think about barnstorming aviators in the early 1900s planning their next airshow. "We'll go into a power dive at 10,000 feet, start our pull out at 500 feet and clear the treetops by inches. It'll be epic!"

I'm an inveterate gambler and there's nothing that gets my blood pumping like a speculative stock with a great risk-reward profile. In Tesla's case, the stock is already priced to perfection, and I see very little short-term upside potential. It may hold its current value if Model S production ramps up without a hitch and the cash low point forecasts are accurate, but the price is likely to crater if Tesla encounters any of the delays, glitches and difficulties that mature companies plan for when launching a new and unproven product.

When I walk into a casino and lay $10 on the roulette table, I expect to lose $10 if things go badly and win $360 if the wheel is kind. Without the upside potential, I wouldn't be willing to play the game. Tesla strikes me as a stock with immense risk and very little potential reward, a bit like even odds at roulette.

I have no direct or indirect interest in Tesla, and I have nothing to gain or lose from its success or failure. I'm just watching the airshow from a safe distance. I'll be the first to cheer if Tesla pulls out of its power dive and clears the treetops without tearing the wings off the plane. Just don't expect me to ride up front in the passenger seat.

John Petersen, a lawyer and CPA, has specialized in advising companies on corporate finance and business development for more than 30 years. He writes the deathless prose and dire warnings investors read in offering documents and SEC reports. While Petersen has served as a board member or executive officer for a handful of public companies, the bulk of his work is behind the scenes where precision and a passion for detail are essential. Petersen�s investing style is that of �elephant hunter,� and nothing grabs his attention like a �multi-bagger� in the rough. His investing time horizon is two to four years. On the long side, Petersen looks for blood in the streets and stock prices that have been beaten down to unconscionably low levels. On the short side, he seeks out high-profile companies that trade at unsustainable levels while hype-intoxicated executives make the same tactical mistakes he�s suffered through with clients. Petersen�s sector focus is batteries and efficient transportation because he has almost a decade of experience in the industry, including a three-year stint as board chairman of an R&D-stage battery-technology developer. He�s convinced these sectors are emerging investment mega-trends.

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