Last month, Elon wondered out loud if Ford would make it through the next recession. "SAY WHAT?" went those oh so savvy investment gurus. "Tesla is the bad bet."
Uh, no. Part of being an auto company is the capability to withstand a downturn. As most know, the debt-to-equity ratio is a key indicator of a company's ability to service/pay down debt during a downturn (aka recession). The higher the number the higher the risk that a company won't be able to pay its debt. A good debt to equity ratio is around 1 to 1.5. However, the ideal debt to equity ratio will vary depending on the industry because some industries use more debt financing than others. The difference Between Debt and Equity. ... Equity refers to the stock, indicating the ownership interest in the company. On the contrary, debt is the sum of money borrowed by the company from bank or external parties, that required to be repaid after certain years, along with interest. The root intent of shorts to drive down Tesla's stock price is to increase the company's debt to equity ratio making it harder to borrow money to finance expansion by increasing interest costs to Tesla. Normally, shorts bet on a company being over valued with hopes of making profit as the stock price decreases. That is not what is at work with Tesla; the behavior of shorts in this case defies to customary logic behind shorting a stock. Not all, but most continue to short the stock even after a price decline. They should be reducing their positions as the stock price goes up and selling when it goes down. This is not happening according to the norm in many cases.
The Debt to Equity Ratios of Several Major Auto Companies:
Ford Debt-to-Equity Ratio: 2.86
GM Debt-to-Equity Ratio: 2.49
Tesla Debt-to-Equity Ratio: 1.71
GM Debt-to-Equity Ratio: 1.65
Daimler Debt-to-Equity Ratio: 1.34
Tata Motors Debt-to-Equity Ratio: 0.81
Top 5 Companies with the Highest Debt-to-Equity Ratios
1. General Electric 8.35
2. UPS 6.56
3. Ford 2.86
4. FirstEnergy 2.61
5. Amgen 2.36
As you can see, Tesla is slightly higher than the 1.5 debt-to-equity ratio considered ideal overall. It's important to remember that auto companies tend to rely on debt at a higher level than most because of the capital intensive nature of the business. It costs a lot to build cars and trucks. GM's debt-to-equity is only slightly lower than Tesla's. But look at Ford. At 2.49, Ford is much higher. Where Tesla is rapidly expanding production capacity, Ford is an established company that is engaged in closing plants. Ford has decided to stop making most passenger cars altogether except for the Mustang. Tesla is rolling out new models as fast as it can.
With warning bells going off all over the place that a recession is or soon will occur, Ford is an a far more tenuous position than Tesla. GM, Daimler and Tata (Jaguar Land Rover's parent) are in better positions. It is worth noting that the Jaguar Land Rover division reported a massive $4 billion loss earlier this year.
If you look at this, Ford looks like the far worse bet. Yet, it isn't as far as the shorts are concerned. Currently, Ford's short volume ratio sits around 13%, while Tesla's is habitually in the mid to high 20% range. That doesn't make sense.
One company is contracting in its core business while the other is expanding. Ford is heavily in debt -- thanks to stock buybacks to prop up the share price -- while Tesla, though far from debt free is in much better shape than Ford in terms to debt-to-equity ratio.
It's why Musk made the statement about Ford and he's probably far more right about that than the shorts are proclaiming Tesla's imminent doom.
That said, don't be surprised to see a sharp downward correction in September/October in the stock market overall. These are the two most volatile trading months historically, many market watchers are predicting a downturn, and the poor economic news flooding in from around the world tend to confirm this. Tesl would be no more immune to such a downturn than any other stock. Almost all would tank to greater or lesser degrees.
Oh, and if things ever go completely south, which is far from impossible at this point, corporate debt will be blamed. The housing market collapse was blamed for the Great Recession. Even worse, the big banks have sold a lot of derivative contracts ($542 billion the last time I looked). While some are betting housing will fall, most of the contracts revolve around debt with corporate debt being the big player. If enough companies default on debt bonds it would trigger a lot of the credit default swaps, etc and could turn an awful problem into a catastrophic one. Will it happen? Nobody knows, but that time bomb is out there.