longtermvalue

Amazon: Is 'Free Cash Flow' More Important Than Net Income?

Thank you for the thoughtful response.

You are correct that I was overly aggressive in writing "Cash is cash is cash" – I was trying to get across that cash flow is a lot closer to economic reality than GAAP, and that one cannot fault cash flow for not being the same as GAAP profits (they are inherently two different things). Cash flow figures can indeed be manipulated, but I still maintain that this is more difficult than manipulating GAAP earnings.

I agree that the benefit of negative CCC will only happen as long as they have revenue growth. But one does not need the negative days to EXPAND in order to generate FCF from WC as long as the business is growing. It appears your argument mirrors Mulford’s (I own a copy of this book) on page 137 regarding HD. Incremental improvements from the current level probably should not be counted on without strong justification. But I would also point you to page 250, where he goes through the different layers of CFFO adjustments for WC. Most of the arguments presented in the original post and responses seemed to designate AMZN’s WC changes as “layer 1,” or CFFO that warrants reversal since it is clearly non-recurring. I tend to think that given AMZN’s long history of negative CCC, it is not clear that such an adjustment is required, and if it is, it may be more appropriately classified as layer 2 or 3, which require greater care and judgment in their application.

I agree that it can be dangerous to extrapolate this out too far, but is that any more true for WC changes than revenue, COGS, or any other financial metric? There seems to be an almost visceral reaction to negative CCC such that people think it is unsustainable, and that the natural state of the world should be for it to be positive. I just don’t think the case for that point of view has been made.

Additionally, if we were to take the alternative route, how would one go about valuing the float as a financial asset?