Stock – Tesla, Inc
Ticker – NASDAQ: TSLA
Sector – Consumer Cyclical
Halal – Yes
Why it’s a buy – Huge recent growth
You want to buy Tesla stock, but you’re concerned if it is sharia compliant.
Let’s take a look at their financial results for its third quarter ended Oct 21, 2020.
To consider if Tesla is Shariah compliant, we will use the following criteria which consist of qualitative and quantitative analysis. They include two financial ratios.
- The business (high level is it obviously haram/halal?)
- Interest-bearing debt to total assets ratio
- Illiquid assets to total assets ratio
We will only apply the criteria/financial ratios in this article. If you want a detailed explanation of what each criteria contains, you can read our stock screening article. We also, have a halal stock screener course where you can access the materials anytime and it goes through step-by-step how to actually screen a stock (it helped me a lot).
Before we begin our analysis, let’s take a look at some of Tesla’s highlights:
- Revenue – total revenue grew 39% YoY in Q3
- Probability – operating income improved in Q3 to a record level of $809M
- Cash – Quarter-end cash and cash equivalents increased by $5.9B QoQ to $14.5B
Step 1 – The business
Straight forward – there’s no issue on the permissibility of Tesla’s business, which is mainly the sale of electric vehicles.
Compared to the other big companies – there are nowhere near as many ethical concerns. The only major issue is the manufacture of its batteries and the damage it has on the environment.
Step 1 conclusion
We can safely safe it passes the business and ethical side (but do your own due diligence).
let’s move to the next stage.
Step 2 – Interest-bearing debt to total assets ratio
This is the first of the three financial ratios we will use.
The total interest-bearing debt should not exceed 33% of total assets.
Total assets = $45,691m.
Current liabilities = $13,685m
Non-current liabilities = $48m
Total interest-bearing liabilities = $13,733m
We then divide total interest-bearing liabilities ($13,733m) with total assets of the company ($45,691m) and x 100.
This = 30%
Tesla PASSES this stage. But it’s close.
However, there is an alternative screening method for step 2, as discussed below.
Interest-bearing debt to MARKET CAP ratio
An alternative way of step 2 is to compare interest-bearing debt to market cap – this is preferred by the AAOIFI.
We divide Total Interest-Bearing Liabilities ($13,733m) with the Market Cap of the company ($783.12b) and x 100.
This should be under 33%.
We don’t even need to run the calculation here.
It’s clearly under 33% – therefore Tesla PASSES this stage.
Step 2 Conclusion
Ultimately the approach you take on using either the total assets or the market cap depends on the methodology you choose. The scholars are fairly comfortable with either approach – especially in times of market volatility where numbers become abnormal and sharia-compliance thresholds might get triggered a lot as stock market prices seesaw up and down.
Our approach has historically been to prefer the total assets approach unless there are compelling reasons for relying on the market cap approach instead. This should be taken on a case-by-case basis.
Let’s go to the final step.
Step 3 – Illiquid assets to total assets ratio
Illiquid assets should be at least 20% of total assets.
Illiquid assets = $24,217m (total assets $45,691 – total current assets $21,744).
Total assets = $45,691m.
The formula is: Illiquid assets $24,217m/total assets $45,691m *100.
Illiquid assets make up 53% of total assets – this is more than 20%, which is what we want.
As we only need 20% minimum, Tesla PASSES this step.
We’re good so far. Now let’s apply the final step.
Therefore, Tesla PASSES this step.
We at IFG take the view that Tesla stock is sharia-compliant.
A summary of our analysis.
- The business – PASS.
- Interest-bearing debt to total assets ratio – PASS.
- Illiquid assets to total assets ratio – PASS.
If you want a detailed explanation of what each criteria contains, then check out our halal stock screener course.
Please note AAOIFI are currently revising their standards, so the above may be subject to change. Please find the AAOIFI standards here. Furthermore, you must screen each stock after new figures are released to ensure there are no changes to permissibility.