Amazon.com, a large-cap Internet Retail company, moved -6.8 Friday. A lot of investors will be thinking of buying the dip, since the company's average operating margins of 5.4% indicate that the business is fundamentally profitable. But a profitable business does not always translate into value creation for the company's equity investors.
Investors should review the company's profitability, and also its ability to convert these profits into hard cash. Some profitable companies struggle in this respect. For example, an unexpected increase in capital expenditures, or an inability to collect payments from customers can quickly empty a company's coffers despite healthy profits on paper. Let's compare Amazon.com's operating profits and cash flows side-by-side to see this process firsthand.
| Date Reported | Total Revenue ($) | Operating Expenses ($) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 469,822,000,000.0 | 444,943,000,000.0 | 5.3 | -10.62 |
| 2020-12-31 | 386,064,000,000.0 | 363,165,000,000.0 | 5.93 | 14.48 |
| 2019-12-31 | 280,522,000,000.0 | 265,981,000,000.0 | 5.18 | -2.81 |
| 2018-12-31 | 232,887,000,000.0 | 220,466,000,000.0 | 5.33 | n/a |
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 46,327,000,000.0 | -61,053,000,000.0 | -14,726,000,000.0 | -156.8 |
| 2020-12-31 | 66,064,000,000.0 | -40,140,000,000.0 | 25,924,000,000.0 | 19.72 |
| 2019-12-31 | 38,514,000,000.0 | -16,861,000,000.0 | 21,653,000,000.0 | 25.19 |
| 2018-12-31 | 30,723,000,000.0 | -13,427,000,000.0 | 17,296,000,000.0 | n/a |
Amazon.com's margins are stable, yet its free cash flow is declining. Free cash flows are calculated on the basis of operating cash flows (the money coming in from the business) minus capital expenditures (long term investments in the business). This last year, free cash flow have declined because cash flows from operations have decreased during a period where there was a jump in capital expenditures.
Capital expenditures are accounted for on the income statement in the form of depreciation expenses, so the large increase in capital expenditures will eat away at Amazon's future margins unless it increases its revenues or reduces other expenses.
Additionally, we can see that the company has a high rate of cash burn. Although revenue increased and margins remained comparable, the cash flow from operations was drastically reduced. This means the difference between growth rates can be chalked down to either inefficiencies in the business such as delays in accounts receivable, or the use of clever accounting methods to make margins appear better than they are.
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