Title: BYD’s Profit Illusion?
Title: BYD’s Profit Illusion? How Payables Strategy Masks Deeper Cash Flow Issues
As the electric vehicle (EV) market matures, scrutiny over financial practices has intensified—and China’s BYD (Build Your Dreams) has come under the spotlight. Though the automaker reports strong operating performance and surging profits, a deeper look into its financial structure reveals troubling signs: BYD may be stretching its accounts payables aggressively to simulate profitability while remaining fundamentally cash flow negative since its founding. This blog explores how BYD’s supply chain financing strategy distorts financial reality and what it means for investors, suppliers, and the future of China’s EV industry.
1. Understanding the Payables Stretch: A Primer
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.
By Rafael Benavente