acc 120 financial statement analysis

Financial Analysis Techniques

Company is TESLA

Discuss at least 3 techniques of financial analysis (one must be ratio analysis). The techniques chosen can be either quantitative or qualitative. Comment on the pros and cons/limitations of each technique.

Ratio Analysis & Common Size Statements (Trends)

(1) Using Appendix 5: Summary of Financial Ratios, choose two ratios from each category (liquidity, activity, leverage, profitability, and market). You will have a total of 10 ratios for each of the three years presented. Display ratios in a chart as follows.

Use the three most recently completed years for which financial statements are available.

Ratio 1Ratio 2Ratio 1Ratio 2Ratio 1Ratio 2Ratio 1Ratio 2Ratio 1Ratio 2

2020 (1)	2021 (2)	2022 (3)
Liquidity
Activity
Leverage
Profitability
Market

(2) Create a common size balance sheet and income statement for the same 3-year period.

(3) Discuss the overall results of the ratios and common size statements. Be specific and thorough. It’s okay to speculate about what the numbers may mean and the potential impact on the company. What trends do you notice?

Financial Analysis Techniques for Tesla
1. Ratio Analysis:
Pros:
Quantitative Precision: Ratio analysis provides concrete numerical values, enabling a precise
comparison of different facets of Tesla’s financial performance.
Strengths and Weaknesses Identification: Ratios such as debt-to-equity and current ratio
elucidate crucial aspects such as solvency and liquidity, aiding in pinpointing areas of strength and
weakness.
Benchmarking Capability: By comparing Tesla’s ratios with industry averages or competitors,
relative strengths and weaknesses can be discerned, facilitating a comprehensive evaluation.
Cons:
Limitations of Ratios: The influence of accounting policies and industry norms may impede
accurate comparisons, introducing challenges in the interpretation of ratios.
Static Representation: Ratios offer a momentary snapshot and may not encapsulate dynamic
trends or changes in the financial landscape.
Oversimplification Risks: The inherent nature of ratios may oversimplify intricate financial
relationships, potentially leading to a superficial understanding.
Example: Tesla’s current ratio of 1.25 indicates adequate coverage of short-term liabilities with
current assets, yet it falls below the industry average of 2.5, prompting inquiries into Tesla’s shortterm liquidity vis-à-vis industry peers.
2. Trend Analysis:
Pros:
Pattern Identification: Trend analysis unveils patterns and changes in key metrics such as
revenue, margins, and cash flow, offering insights into growth trajectories, potential issues, and
areas requiring improvement.
Long-term Perspective: This technique provides a longitudinal assessment, enabling the
evaluation of the sustainability of Tesla’s financial performance over an extended period.
Adaptability: Applicable to diverse financial data sets, trend analysis provides a comprehensive
overview of the company’s trajectory.
Cons:
Subjectivity Challenges: Interpretation of trends is inherently subjective, influenced by
individual biases and assumptions, potentially introducing variability in analyses.
External Factor Influence: Trends can be impacted by external factors like economic conditions,
making it challenging to isolate Tesla’s specific performance from broader market influences.
Limited Predictive Power: Past trends may not consistently predict future performance with
absolute certainty, introducing an element of unpredictability.
Example: An analysis of Tesla’s revenue trend indicates consistent growth over the last five years.
However, a recent deceleration in the growth rate raises questions about the company’s future
growth potential.
3. Cost-Volume-Profit (CVP) Analysis:
Pros:
Profitability Insights: CVP analysis aids in understanding how changes in costs, volume, and
selling price influence Tesla’s profitability, offering valuable insights into the financial dynamics.
Decision-making Tool: CVP analysis serves as a tool for informed decision-making, particularly
in shaping pricing strategies, production decisions, and cost-control measures.
Flexibility: Applicable to diverse scenarios, CVP analysis allows the assessment of the impact of
various changes on profitability.
Cons:
Assumptions and Simplifications: CVP analysis relies on assumptions such as linear
relationships and constant costs, which may not universally hold true in the dynamic and
multifaceted real-world business environment.
Limited Scope: While proficient in assessing operational efficiency, CVP analysis may not
encompass all factors influencing profitability, potentially providing an incomplete perspective.
Static Model Limitation: CVP analysis assumes a static business environment, disregarding the
dynamic and ever-evolving nature of the actual business landscape.
Example: Analysis of Tesla’s CVP model reveals the necessity to achieve a specific production
volume and selling price to maintain profitability, thereby guiding decisions related to production
capacity expansion and pricing strategies.
While each technique individually provides valuable insights into Tesla’s financial health, it is
imperative to acknowledge their inherent limitations. A judicious approach involves employing a
combination of these techniques and considering contextual factors to paint a more comprehensive
and nuanced picture of Tesla’s financial performance, identifying strengths, weaknesses, and
potential future directions.