BYD’s Profit Illusion (UPDATE)? How Payables Strategy Masks Deeper Cash Flow Issues

By Rafael Benavente

BYD’s Profit Illusion? How Payables Strategy Masks Deeper Cash Flow Issues

A new article update in MSN article published by WSJ

Accounts payable represents money owed by a company to its suppliers. When a firm extends its payables period (i.e., delays payments), it temporarily improves cash flow by holding onto its cash longer. This tactic can be helpful in the short term but often indicates deeper liquidity pressures.

In BYD’s case, this strategy has taken on a massive scale. According to Financial Times and Bloomberg reports, BYD had a working capital deficit of RMB 125.4 billion by the end of 2024. This figure means its current liabilities exceeded current assets by a staggering amount, putting intense strain on its operational liquidity.

2. Profitability vs. Cash Flow: The Key Distinction

While BYD reports positive net income and operating cash flow, this doesn’t tell the full story. True financial health involves being able to self-fund operations without relying on supplier financing, loans, or asset sales. Between 2019 and 2022, BYD’s net cash from operations remained below net profit, and its free cash flow (operating minus capital expenditures) was often negative.

Analysts note that BYD has managed to show positive net income by pushing out payments to suppliers, effectively generating accounting profits while still depending on outside capital to function.

3. Supplier Pressure & Government Crackdown

The scale of BYD’s delayed payments has affected its entire supply chain. In response, Chinese regulators have started enforcing 60-day payment rules to protect smaller manufacturers and stabilize the auto sector. The Financial Times reported that BYD is among the worst offenders, with a significant portion of its supply chain financing creating hidden debt risks.

These practices could harm BYD’s long-term supplier relationships and damage its reputation if partners begin demanding tighter terms or dropping contracts altogether.

4. Analysts Weigh In: Is This Sustainable?

GMT Research called BYD’s strategy "financial engineering," warning that its working capital maneuvers mask ballooning debt and unsustainable operations. Citic Securities has also noted potential liquidity risks if BYD cannot shift to a more balanced capital cycle.

Some analysts argue this is part of a larger trend in China’s hyper-competitive EV sector, where dozens of companies have competed on razor-thin margins to gain market share. As the industry consolidates, BYD’s tactic may become increasingly dangerous.

5. What the Numbers Really Show

BYD’s financials show a sharp rise in reported operating cash flow in 2023 (RMB 169.7 billion), but this came alongside a ballooning of current liabilities. Without delayed payables, BYD’s free cash flow would likely turn negative again.

Moreover, its capital expenditures, R&D spending, and expansion into overseas markets (such as Brazil, Hungary, and Thailand) suggest that internal cash generation is insufficient to sustain its growth.

6. Implications for Stakeholders

*Investors:* Relying on net profit figures alone may paint an overly rosy picture. When analyzing BYD, investors should scrutinize its cash conversion cycle and adjust valuations for working capital dependencies.

*Suppliers:* Vendors exposed to BYD should prepare for potential delays and strengthen contract terms to avoid becoming collateral damage.

*Competitors:* BYD’s scale gives it leverage, but this financial posture creates systemic risks for the entire EV supply chain in China.

*Regulators:* Efforts to enforce fair payment cycles may define the next phase of market maturity in China’s EV boom.

7. Final Thoughts: Strategy or Red Flag?

It’s important not to confuse BYD’s aggressive working capital management with fraud or financial misrepresentation. These tactics are legal and commonly used by high-growth companies. However, the scale at which BYD relies on delayed payments raises questions about its long-term sustainability.

With regulators stepping in, investors growing wary, and industry consolidation looming, BYD must either transition to a more transparent and balanced financial structure or risk falling victim to its own aggressive expansion. For now, BYD may look profitable on paper—but underneath, the cash flow story tells a far murkier tale.

8. Comparing BYD with Tesla and Other EV Makers

To better understand BYD's financial posture, it helps to compare its strategy with other electric vehicle makers, especially Tesla. Tesla, for example, has moved toward increasingly positive free cash flow as its production scale and margins have improved, especially since 2020. While Tesla also utilizes supplier financing and benefits from extended terms with vendors, its reliance on delayed payables has decreased over time.

In contrast, BYD continues to ramp up spending on R&D and global plant construction, including large capital commitments in Brazil, Hungary, and Southeast Asia. Unlike Tesla, BYD’s capital expenditures and expansion plans are not fully supported by internally generated cash flows. NIO and XPeng, two other Chinese EV firms, have also faced similar challenges with capital burn and negative free cash flow. However, BYD’s advantage in vertical integration and battery production gives it a longer runway, albeit one still paved by aggressive financial engineering.

9. Payables Stretching in Historical Context

Stretching accounts payables is not new in the business world. During the 1990s and early 2000s, companies like Dell and Walmart were known for optimizing their supply chains and payables strategies to preserve cash. The difference, however, lies in proportionality. These firms typically had positive free cash flows and used extended terms as a tool, not as a crutch.

In contrast, when companies use payables extension to mask structural cash flow issues, it becomes a red flag. Historical examples include Sunbeam and WorldCom, both of which appeared profitable until liquidity crises exposed underlying weaknesses. While BYD is not accused of fraud, its heavy reliance on delayed payments as a source of liquidity raises similar concerns.

If BYD is forced by regulators or market pressures to normalize its payable cycles, the strain on its balance sheet could be substantial, especially if cash inflows from operations do not ramp up concurrently.

10. Expanded Final Thoughts

As BYD positions itself as a global leader in the electric vehicle space, its financial practices must evolve to reflect sustainable growth. Investors are no longer simply looking for top-line growth or unit delivery milestones. Instead, they are analyzing profitability, free cash flow, and capital efficiency.

BYD's reported profitability may meet accounting standards, but the company’s operational sustainability remains uncertain under its current strategy. Suppliers should also be vigilant—payment delays may hurt smaller partners who rely on prompt cash flow. Policymakers are aware of this issue and may tighten industry-wide regulations, especially as EV manufacturing becomes more systemically important in national industrial policy.

Ultimately, the question is not whether BYD is growing—clearly it is. The question is whether that growth is built on a solid financial foundation. As the market matures, transparency, reliability, and true cash generation will matter more than ever.

By Rafael Benavente