Free cash flow is a measure after capital expenditures and incorporates fluctuations in working capital.
Since founding, BYD’s modus operandi has been to re-allocate every dollar of operating cashflow + as much capital as it can raise — as non-dilutively as possible — to support the needs of a rapidly growing business.
Frankly, it is financially illiterate to describe re-investment back into a growing business as “losses”. Negative cashflow is a cashflow item and — especially if related to CapEx and working capital fluctuations (which I will address below) — is conceptually different from “losses” which is an income statement term.
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A better approach is to consider …
Free cash flow is a measure after capital expenditures and incorporates fluctuations in working capital.
Since founding, BYD’s modus operandi has been to re-allocate every dollar of operating cashflow + as much capital as it can raise — as non-dilutively as possible — to support the needs of a rapidly growing business.
Frankly, it is financially illiterate to describe re-investment back into a growing business as “losses”. Negative cashflow is a cashflow item and — especially if related to CapEx and working capital fluctuations (which I will address below) — is conceptually different from “losses” which is an income statement term.
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A better approach is to consider how much long-term capital the company has raised an compare it to the scale of operating capacity that capital has enabled.
We can look at this from BYD’s latest balance sheet, which I have summarized here: **
To date, BYD has taken in a total of ¥340B in debt and equity funding.
This number includes ~¥82B of ST/LT borrowings and ¥258B of equity (or equity-like) funding.
The equity funding includes ¥107B of “undistributed profit” which is similar in concept to retained earnings (we’ll get back to this point in a bit). **
This capital (~$23B in USD, net of cash) has funded the buildout of BYD’s operation today, which includes:
(i) its contract manufacturing operation (~$27B in revenue, ~1/5th the size of Foxconn)
(ii) the world’s second-largest battery business (after CATL), and
(iii) the world’s largest (and a highly verticalized) NEV production operation which combined with the battery business generates ~$100B in revenue @ ~22% gross margin and has ~7M in production capacity (incl. construction-in-progress) **
Just to put this in perspective, Tesla’s comparable figure is $38B (shareholders’ equity minus cash and ST investments), >60% higher than BYD ($23B).
This has funded a business that generates ~$80B in run-rate revenue (~16% gross margin) and vehicle production capacity of ~2.4M p.a.
Note: Tesla is not some inefficiently run company; I’d argue that it is the most capital-efficient and best-run advanced manufacturer outside of China today. **
So the better way to look at this is not “accumulated free cash flow” but considering whether the operating business/footprint today justifies that capital that has been invested + whether business can continue compounding at a high rate of return going forward.
This is almost certainly the way Charlie Munger and Warren Buffett looked at the investment over their long ownership period starting in 2008. **
OP highlights the supplier financing question. This is something I have analyzed before.
If BYD were to switch a normal payable days cycle, this would result in ¥106B in additional net working capital.
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This is how that change impacts BYD’s balance sheet.
Effectively, what was once funded by negative working capital is now funded by additional borrowings (or a drawdown out of the ¥175B it has in cash and equivalents).
This increases BYD’s net capitalization to ~$38B, in line with Tesla’s.
Note: BYD is still running a negative net working capital balance after the pro forma reduction in payables. But this new pro forma balance is in line with Tesla, which also runs a substantial net operating** working capital deficit.
** current operating assets (excl cash/equivalents) minus current operating liabilities (excl ST borrowings) **
Thus for the same level of nominal $/¥ capitalization, compared to Tesla, BYD produces: (i) ~3x the car volume
(ii) ~2x the gross profit (far more vertically integrated), and
(iii) has a large CM business to boot.
It is growing faster than Tesla on a YoY business and choosing to re-invest more heavily in the business, as evidenced by its continued rapid expansion in production capacity and R&D workforce, investing ~1.5x as much CapEx and ~2x as much in R&D (~6x the number of engineers). **
This financial illiteracy has extended to comments below like this.
Referencing the aforementioned “undistributed profits” or “retained earnings”, we can clearly see that BYD has generated cumulative profits of ¥107B since inception.
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Per above, these profits — and more, via external capital raising at significant premiums to book value — have been reinvested back into the business, at high RoICs, especially if you take into account the long-term, highly efficient operation that has been built. **
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