What PE ratios don't tell you

Last week, I wrote about how Amazon's heavy spending on growth kept profits artificially low, making it look optically expensive. Nick Sleep saw past that and made it a career defining investment. BYD, the Chinese EV maker, does something similar.

BYD spent 135% of profit on R&D in 2024. This wasn’t a one-off. In 13 of the past 14 years, R&D spend has exceeded net profit. In 2019, when profit crashed 40% year on year due to subsidy cuts, BYD increased R&D spend by 12%.

And there's an accounting detail most people miss: BYD expenses ~98% of its R&D immediately, rather than capitalizing it. Most automakers split this closer to 50/50. That single choice makes BYD's reported profits look significantly worse than peers, and its PE ratio higher than it should be.

Today BYD trades at a PE of 26.4. Tesla, which BYD overtook in sales last year, trades at 345. Tesla spent 64% of its profit on R&D. Toyota spent 28%.

The real threat is from domestic competition, which is brutal. BYD's China sales dropped 8% in 2025. Geely, Xiaomi, and Leapmotor are innovating fast.

BYD’s 120,000 R&D engineers file 45 patent applications and get granted 20 patents every day. That has produced flash charging that goes from 10 to 70% in five minutes, vehicles that park sideways, and cars that can drive on water for 30 minutes. These aren't concepts, they're cars you can buy and drive today.

Wang Chuanfu, the founder of BYD, set out in the early 2000s to build a major global automaker from scratch. He did it.

Disclaimer: Not a stock recommendation. Do your own research.