Amazon Free Cash Flow

Meaghan Royce

Financial Management

February 4, 2012

Essay #1

Amazon and Free Cash Flow

In the article “Will Amazon Burn Through Its Cash?” by Vincent Ryan, we read about how Amazon is having trouble with decreasing free cash flow. Free cash flow is defined as the amount of cash that could be withdrawn from a firm without harming its ability to operate and to produce future cash flows.

There is definitely a difference between cash flow and revenue or profit. Just because you make a profit, doesn’t mean you have cash flow and just because you have cash flow doesn’t mean the business is profitable.

It states, “Retailing giant Amazon.com continues to grow revenue, but its operating margin and free-cash-flow metrics are worsening, raising questions about the sustainability of the company’s growth and its investment strategy.” The operating margin is a ratio used to measure a company’s pricing strategy and operating efficiency. If Amazon.com has increasing revenue, why would their free cash flow be decreasing? This probably has to do with how much money they are spending and how wisely they are running their business. To have positive cash flow, a company’s cash coming in must exceed its cash going out of the business.

Free cash flow is calculated by adding the net income and amortization/depreciation and subtracting changes in working capital and capital expenditures. This is done to be able to forecast the company’s financial standing and if it’s decreasing, there is usually a problem.

The article also states, “Fourth quarter revenue grew 35% but operating expenses grew 37%...Amazon’s spending spree is causing free cash flow to lag.” This is talking about the fact that although the revenue grew fast by 35%, the expenses grew faster and if this continues the company won’t be making a profit anymore and will no longer be a good investment.

“Amazon’s ‘free-cash profile’—a forward-looking metric developed by Mulford that measures the amount of...