Wednesday, October 22, 2014

Amazon Provides A Valuable Lesson On Cash Flow Versus Net Income

Amazon is regarded as a highly successful company despite low profits.  It is also able to invest in new businesses without going into debt.  This article explains how Amazon does it.  It provides a good lesson on the differences between net income, cash flow and free cash flow.  Amazon generates an enormous amount of free cash flow that is well above its net income.  It uses its free cash flow to fund its investments. 

Its important to understand the cash conversion cycle (CCC) to appreciate how it differs from other highly efficient retailers like Wall-Mart and Costco.  The cycle is calculated by adding days of inventory to days sales outstanding, and subtracting days you take to pay your providers.  Amazon excels at managing its CCC.  It manages inventory well and it gets paid promptly but it really stands out in the days that it takes to pay its providers.  Amazon is in a class by itself along with Apple, they both have negative CCC scores.

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