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Here are Amazon's (NASDAQ:AMZN) Accounts Payable days over the last few years (and quarter over quarter). Accounts Payable days measure the number of days on average that it takes to pay a supplier. The numbers are taken directly from Amazon SEC filings.


(Click to enlarge)

Notice a trend? Amazon continues to extend the time it takes to pay a supplier. It now takes Amazon nearly 11 weeks to pay a supplier, up from just over 7 weeks in 2006. Taking longer to pay means Amazon gets to hold on to more of their supplier's cash, effectively borrowing it from them as Accounts Payable. While adding an extra 22 days to the time it take to pay Accounts Payable may not sound like much, it adds a lot of cash to your balance sheet when you have $70 billion a year in sales. And because it is considered a change in working capital, it is reported as operating cash flow. This allows Amazon cheer leaders run around talking about "Cash Flow Growth". But it cannot be sustained as a source of cash flow growth. There is a limit to the terms suppliers will give you - and Amazon has reached it. How can you tell?

After peaking at the end of 2012 at 76 days, they have flattened out. Suppliers simply will not put up with being paid later than that. If you ship goods to Amazon today, you get paid for them at the end of February. But they sell them for Christmas. As a supplier, you get to pay interest on your credit facility for two and a half months to advance inventory to Amazon. You think Amazon can extend that to St. Patrick's day? Not a chance.

It's interesting, because when you do credit analysis (and I was a credit analyst once), stretching A/P days is generally something you look at as a sign of distress. Paying people late is usually something you only do when you are running out of money. But for some reason, equity analysts are touting it as a sign of strength, saying things like "Amazon is so big they can get better terms." So maybe they can, but counting it as sustainable cash flow growth is just wrong because it has a limit. Once you reach that upper bound, you can no longer use it to generate excess cash.

And even more interesting, is that Moody's sees it too. Amazon's credit rating is just Baa1. If you know anything about credit, you know that is only 2 levels above junk. Yet long term notes are just $3 Billion and the market cap is $176 Billion. Long term debt to market cap is under 2%, yet the debt rating is barely above junk. Equity investors have been so blinded by the topline growth that they've failed to do the most basic cash flow analysis. And that is going to be their undoing.

Source: Amazon's 'Sustainable' Cash Flow