The shift to electric is coming. The International Energy Agency (IEA) estimates that roughly 60% of new vehicles sold will be electric in 2030. Tesla (TSLA +0.70%) was a first-mover. Investors have fiercely debated the company's stock, which trades at a hefty premium to those of competitors like Ford and General Motors.
One could argue that Tesla is a car company with money-sucking capital requirements like any other automotive maker. Others might say Tesla is a technology company that goes beyond vehicles. But there's something about Tesla that matters way more than this argument.
Here is the chart that matters, and why it makes Tesla a superior stock to its electric vehicle (EV) competitors.
What is the return on capital employed?
In a way, Tesla is both an automotive and a technology company. Its unique factories, product plans, and eccentric CEO make it almost as fascinating a story as it is an investment. But you can look at the company's return on capital employed to get down to brass tacks and illustrate how the business is performing.
NASDAQ: TSLA
Key Data Points
The return on capital employed is a ratio (displayed as a percentage) that shows the return generated on a company's financial assets. It's calculated by dividing a company's earnings before interest and taxes (EBIT) by its capital employed. You can think of a business as a machine -- and when you put a dollar of capital into it, how much are you getting out?
You can compare the return on capital employed between similar companies to get a sense of how efficient each business is.
Where Tesla stands out
Let's do that with Tesla, legacy competitors like Ford and General Motors, and start-up Rivian. Below, you'll see that Tesla has a significantly higher ROCE than all of the others -- Rivian's is profoundly negative at this point:
TSLA Return on Capital Employed data by YCharts
What explains these numbers? It's undoubtedly a combination of things, but it could boil down to some observations. First, a company must be profitable to generate a positive ROCE; Rivian is still unprofitable, because it doesn't manufacture enough vehicles to offset the costs of running its factories.
Ford and General Motors are profitable, but they are straddling two businesses -- the new and old, electric vehicles and legacy combustion engine cars and trucks. Ford recently split its financials for the two sides of the company apart, disclosing that it lost around $3 billion in the past two years in the EV business and will lose $3 billion more in 2023.
Why it makes Tesla a buy
Tesla stands out as the most established pure-EV company on the market. Rivian is playing catch-up, and will probably burn billions more in cash as it ramps up production. Meanwhile, Ford and General Motors could see their return on capital employed decrease as they invest in building their EV businesses. They must also continue balancing two types of vehicles that use different technology -- and that added cost burden may make it difficult to operate as efficiently as Tesla.
This efficiency stands out when it comes to earnings growth. Analysts expect nearly 25% annual earnings growth from Tesla over the long term, and negative growth for Ford and General Motors. That arguably justifies the gulf between Tesla's price-to-earnings ratio (P/E) and the rest of the field.
TSLA PE Ratio (Forward) data by YCharts
Notably, Tesla's potential earnings growth could burn off any conceived premium in the stock over the next several years. Even at a market cap of $600 billion, Tesla has a case for a growth stock label. The company's long-term production goals still dwarf the 1.37 million units it produced in 2022.
Tesla's superior return on capital employed positions it for strong earnings growth (and investment returns as a result) as EVs take center stage over the next decade and beyond.
