The logic behind Amazon’s (NASDAQ:AMZN) operating cash flows


The famous retailer that has revolutionized the shopping experience was once among the hottest stocks. However, the company still hasn’t made public information regarding its products like Kindle, Amazon Fresh, AWS and Amazon prime. Investors have no clue how they are paying off in financial terms. Amazon (NASDAQ:AMZN) reported an operating cash flow of $5.7 billion in the past twelve months with a loss of $216 on its income statement.

However before any conclusions could be drawn from this, we must analyze the company a bit more. Analysts have often referred to the income statement being used to reconcile a balance sheet between two financial periods a flaw. Non-cash charges should be considered as they give detail as to where cash came from and where it is headed, like depreciation. In order to fix this mistake, the cash flow statement is used which is released along with the balance sheet and income statement by companies in each of their reporting quarters.

A plus point of Amazon’s (NASDAQ:AMZN) growth is its negative cash conversion cycle. This means that when a person buys something from Amazon (NASDAQ:AMZN), it is paid for immediately. However, Amazon (NASDAQ:AMZN) pays its suppliers after a month, two months or in some cases three. Therefore Amazon (NASDAQ:AMZN) will make some money from this delayed payment from each of its sales. This alters the accounts payable and receivable in the cash flow statement to mean something else.

In the past year, Amazon (NASDAQ:AMZN) generated cash amounting to $1.83 billion by increasing accounts payable and at the same time spending $1.17 billion by increasing receivables by customers. Amazon (NASDAQ:AMZN) made a net operating cash flow of $661 million from this negative cash conversion cycle. Another advantage that Amazon (NASDAQ:AMZN) has going for it is its additions to unearned revenue. This means that the prepayments for AWS and Amazon prime are spread out on the income statement as revenue to be earned over a year.

This approach makes near term flow of cash look stronger just like the negative cash conversion cycle. In only the last year, Amazon (NASDAQ:AMZN) reported $3.87 billion unearned revenue with amortized previous unearned revenue at $3.18 billion. The net cash increase was $699 million. People say that Amazon (NASDAQ:AMZN) has been increasing investments in its fulfillment centers as well as equipment which will in turn increase profits and future growth.

However, Amazon (NASDAQ:AMZN) is really not investing enough to record a positive net income that should have been reported for over a decade. Amazon (NASDAQ:AMZN) invested over $4.63 billion in equipment, software and property and has recognized $4.33 billion in its depreciation for these activities. Equipment that has been depreciated is old thus needs to be replaced so Amazon (NASDAQ:AMZN) is basically investing in order to maintain and improve its business instead of further growing it.

When a business depreciates its assets while investing in new ones, it’s difficult to argue about the fact that the cash flow statement gives a better value than the income statement or not.