Why is Amazon free cash flow negative?
The major reason behind Amazon's negative cash flow is its high capital expenditures and reliance on debt. However, this is simply because it reinvests its profit rapidly in innovative products.
Negative cash flow is when your business has more outgoing than incoming money. You cannot cover your expenses from sales alone. Instead, you need money from investments and financing to make up the difference. For example, if you had $5,000 in revenue and $10,000 in expenses in April, you had negative cash flow.
Free Cash Flow Results
In its latest quarter, the company generated $36.8 billion in FCF over the last 12 months (LTM). That was 72% higher than the $21.4 billion in LTM FCF it made last quarter. I discussed this in my prior Barchart article, “Amazon.com Stock Looks Undervalued to Investors Given Its Positive FCF.”
In a year marked by drastic cost-cutting measures — from ending experimental projects to pausing grocery store growth to cutting 18,000 jobs — Amazon lost $2.7 billion in 2022, the company reported Thursday.
The Amazon cash conversion cycle is negative because they sell merchandise rapidly (low Days inventory), receive money immediately for most sales (low Days Receivables), and defer payment to suppliers for as long as feasible (high Days Payables).
Yes, a profitable company can have negative cash flow. Negative cash flow is not necessarily a bad thing, as long as it's not chronic or long-term. A single quarter of negative cash flow may mean an unusual expense or a delay in receipts for that period. Or, it could mean an investment in the company's future growth.
On the other hand, when it's negative, that means your enterprise isn't producing enough cash to support the growth of the business. The upshot: Positive free cash flow means you have sufficient money to invest back into the business for growth or to distribute to shareholders.
Amazon annual free cash flow for 2023 was $36.813B, a 418.2% decline from 2022. Amazon annual free cash flow for 2022 was $-11.569B, a 27.57% increase from 2021. Amazon annual free cash flow for 2021 was $-9.069B, a 129.24% decline from 2020.
As of today (2024-04-09), Amazon.com's share price is $185.67. Amazon.com's Free Cash Flow per Share for the trailing twelve months (TTM) ended in Dec. 2023 was $3.03. Hence, Amazon.com's Price-to-Free-Cash-Flow Ratio for today is 61.36.
Amazon was also struggling to generate cash flow in the early years all the way up to 2001. Since 2002 Amazon has been generating Free Cash Flow every year. In 2007 the company broke $1 billion free cash flow and has grown.
What are the negatives of Amazon?
- High competition. ...
- High selling fees. ...
- Complex order management. ...
- Lack of control and ownership. ...
- No insight into customer data. ...
- Risk of scams. ...
- Limited warehouse space. ...
- No control over customer care and satisfaction.
With the new high, Amazon has fully bounced back from a down period that started in late 2021 and stretched to early in 2023. Amazon stock fell nearly 50% in 2022. The company is last among the trillion-dollar tech giants to make a full recovery after the post-pandemic selloff of 2022.
With these higher-margin businesses growing faster than their lower-margin ones, Amazon's gross profit has steadily risen to new all-time highs. This trend shows no signs of slowing in 2024, leading to new records. The higher gross margin will also lead to improved profit.
- 1 Anti-competitive practices. 1.1 One-click patent. ...
- 2 Fraudulent book listings.
- 3 Treatment of workers. 3.1 Employee mismanagement. ...
- 4 Treatment of customers. 4.1 Differential pricing. ...
- 5 Competitive advantages. 5.1 Tax avoidance. ...
- 6 Governments. ...
- 7 Product availability. ...
- 8 Partnerships and associations.
A negative cash conversion cycle means that inventory is sold before you have to pay for it. Or, in other words, your vendors are financing your business operations. A negative cash conversion cycle is a desirable situation for many businesses.
For example, large retailers such as Amazon often have negative CCCs as they can take advantage of the suppliers' credit and turn their inventory quickly. However, eCommerce businesses tend to have high CCCs as they do not have the luxury of relying on their supplier's credit to finance their operations.
- Create a cash flow statement. You won't be able to manage your finances without accurate, up-to-date financial statements. ...
- Review and reduce outgoing expenses. ...
- Find access to back-up cash. ...
- Automate y createsour accounting processes. ...
- Streamline your payments process.
- Restructuring debt to lower interest rates and optimize repayment schedules.
- Reducing, limiting or delaying capital expenditures.
- Hiring a CFO, or fractional CFO to improve financial strategy and business operations with management accounting.
A higher free cash flow margin suggests that the company is effectively controlling its costs and is efficient in its operations. It's a sign of a healthy, well-run business with the potential for growth and profitability.
There are an infinite number of factors that could contribute to a negative cash flow, the most common are: High operating expenses - these are costs associated the operating activities of a startup: rent, equipment, marketing, payroll, insurance, step costs, and funds allocated for research and development.
How does Amazon generate cash flow?
Amazon is a strong generator of cash, and the two principal components of the bridge from earnings to operating cash flow are: 1 Depreciation and amortisation of $15.3bn. Amazon has $96bn of property plant and equipment, of which equipment represents $55bn. 2 Stock-based compensation of $5.4bn.
Amazon cash on hand for 2023 was $86.78B, a 23.93% increase from 2022.
Burn rate is defined as the negative free cash flow (FCF) during the month. You can calculate this during a specific month, or average out over a longer time period, like three months or one year. Burn rate is used when calculating cash runway — the number of months until cash runs out.
Cash on Hand as of December 2023 : $86.78 B
According to Amazon's latest financial reports the company has $86.78 B in cash and cash equivalents. A company's cash on hand also refered as cash/cash equivalents (CCE) and Short-term investments, is the amount of accessible money a business has.
A “good” free cash flow conversion rate would typically be consistently around or above 100%, as it indicates efficient working capital management. If the FCF conversion rate of a company is in excess of 100%, that implies operational efficiency.
