Cash Flow Analysis of Amazon

This assignment analyzes the importance of cash flow analysis for companies like Amazon. It differentiates between accounting earnings and cash flow, highlighting that free cash flow is a more valuable indicator of financial health. The text argues that focusing on cash flow over accounting earnings leads to better investment decisions and provides empirical evidence supporting this claim.

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Introduction

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For amazon, financial analysis is primarily important as it will assess the actual situation of the
company and its performance. However, Amazon is using cash flow analysis statement more
than its profitability index. This is sustainable since a company’s cash flow financial statement is
a reflection of the company’s profitability levels and the financial health of the company. As a
leading company in the world, Amazon is highly profitable and has a positive cash flow over the
last couple of years. This shows it also has a profitable structure that runs into billions. Financial
analysis is based on financial indicators calculations to express the profitability, yield,
indebtedness, operational efficiency and liquidity(Allman, 2013).
When analyzing the fundamentals of a business, most of the time attention is usually focused on
the company's accounting earnings. But free cash flow can be a more valuable and transparent
indicator in this regard. In addition, statistical data demonstrate that selecting investments based
on cash flows tends to produce long-term winning results.
Cash Flow vs. Earnings
Accounting gains and cash flow are two related but materially different concepts. The accounting
result of a company measures the sales and costs in a certain period, beyond if the income and
expenses of cash were realized or not in that particular period. Instead, cash flows show cash
inflow and outflow through different paths(Subramanyam, Wild and Halsey, 2014).

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There is no magic or infallible formula for selecting winning actions. However, investing in
companies with high returns for free cash flows makes enough theoretical sense, and empirical
evidence shows that the practical results tend to be attractive.The accounting results of the
business are based on all types of assumptions and assumptions of the firm's management team;
this includes estimates of depreciation and amortization, inventory accounting, or bad loans,
among other things. On the other hand, cash flow does not address these issues, it simply reflects
inflows and outflows of funds, therefore, it is an indicator that cannot be manipulated by the
management of the company to the same extent as accounting results(Subramanyam, Wild and
Halsey, 2014).
In this case for Amazon, it may happen that the business faces liquidity needs, before which it
needs to issue debt or new shares to raise capital. Instead, when we select assets based on their
cash flow, we will be focusing on companies that do not need external financing to continue
growing, which has clear benefits in terms of risk and sustainability.
A classic indicator in this regard is free cash flow, which is calculated by taking operating cash
flows and discounting investments in capital expenditure. Basically, free cash flow tells us how
much cash the business produces from its operations after financing the investments needed to
sustain and continue to grow(Li, 2013).
Conclusion
As with other similar indicators, it is very important to keep in mind that business cash flows can
change over time, and the analysis should always be dynamic as opposed to static. The key is to
pay attention to the evolution of cash flows over time, and not assume that a certain value for a

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particular year tells us everything we need to know about the business. Beyond this, statistical
data indicate that selecting companies based on profitability by free cash flow tends to be a
winning strategy over time. According to a study by Manning Napper Advisors, shares of
companies with a high free cash flow return tend to outperform the market average. In the same
sense, the data are consistent in this regard, indicating that there is a direct relationship between
profitability through free cash flow and investor earnings: (Lutolf-Carroll, LLP and Pirnes,
2014).

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References
Allman, K. (2013). Modeling structured finance cash flows with microsoftexcel. Hoboken, N.J.:
Wiley.
Li, J. (2013). Risk management of supply and cash flows in supply chains. [Place of publication
not identified]: Springer.
Lutolf-Carroll, C., LLP, W. and Pirnes, A. (2014). From innovation to cash flows. Hoboken,
N.J.: Wiley.
Subramanyam, K., Wild, J. and Halsey, R. (2014). Financial statement analysis. New York, NY:
McGraw-Hill Education.

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