ANALYSIS OF BEZOS' FCF pronouncements
A critical concern with Bezos' pronouncement (calling free cash flow (FCF)/share the "ultimate financial measure") is that FCF/share does not fully and accurately measure Amazon.com's financial performance in a medium to long term context. As with any online retailer, Amazon's most objective analysis should involve an earnings or net income parameter. Certain management dissatisfied with the level of their reported net income wrongly assert that cash flow is a more valid performance measure than is net income. That assertion assumes that depreciation and other non-cash costs are not valid expenses. However, history of the retail industry sector suggests that only net income is properly regarded as a measure of performance that can be directly related to the equity investment as indicative of operating performance. If we add back depreciation to net income and determine a resulting return on investment (ROI), we are confusing ROI with some aspect of ROI for fixed assets.
Next, we must further analyze Bezos' viewpoint while understanding that no other statement measures profitability as well as the income statement. Admittedly, income statements do NOT usually reflect timing of cash flows and direct effects of operations on liquidity and solvency. Several of those effects are reported on the statement of cash flows (SCF).
Next, note that analysis of cash from operations (CFO) reflects a broader concept of operations than net income. These cash flows encompass all earnings-related activities of the enterprise. In a broad sense, CFO measures not only expenses and revenues but also cash demands of their broader activities, such as investments in inventories and receivables. As such, CFO more c ...