U3 - Discussion Question

This discussion post analyzes Amazon's focus on cash flow over profits, examining the company's cash flow statement, investor and analyst perceptions, and the sustainability of this approach. It explores the trade-offs between short-term gains and long-term growth, highlighting the importance of balancing investor expectations with strategic investments.

U3 - DISCUSSION QUESTION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Critique on Amazon cash flow statement...............................................................................1
Perception of investors and financial analysts towards profits as measure of performance. .2
Amazon's approach sustainable or not in future.....................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Cash Flow statements are referred as statement of cash flow which is the financial
statement that depicts transformations in balance sheet and income statement affects on cash and
its equivalents. It than further breaks down to operating, financing and investing activities. In this
context, the focus of present report will be on providing critique about Amazon's focus on Cash
Flow rather than profits. The evaluation of how analysts and investors perceived profits as
measures of performance in their financial data will be demonstrated in this report. Eventually an
argument whether Amazon’s approach can be sustainable into the future will be created in this
report.
MAIN BODY
Critique on Amazon cash flow statement
Cash flow serves as the basis for calculating the corporate equivalents of disposable
income (The Big Number. 2011). The cash flow figures of Amazon's are exploding. Over past
year, the company has generated a staggering $8.98 billion of operating cash flow and $4.37
billion of free cash flow (Auerbach, 2017). Amazon's free cash flow numbers can be deceptive
as the company's funding additional billion dollar for additional capital spending by utilising
capital leasing. The stock price of company is steadily decreasing which affecting the
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psychology of investors and they begin to lose their patience. In the cash flow statement of
Amazon, more interesting earnings of the company can be found. For instance, company's net
income and cash flow over the past decade is described below:
The distinction between top and bottom line in the chart depicts about the investment
which were mostly done by the management in buildings, machines and other things which can
be found on the income statement but avoided in calculation of operating cash flow (Ma, Pace
and Stryker, 2015). Free cash flow of Amazon does not account of all of its investment. The
money is spent instead of depreciating and amortising over subsequent years. The key metric of
Amazon's cash generating powers elucidated by finance professor at Harvard Business School is
the cash conversion cycle (Fox, 2014).
Perception of investors and financial analysts towards profits as measure of performance
Profits are the most important part of an organisation. Every private and public
organisation with the motive to earn revenue works hard in order to generate ample of profits so
that the investors can be attracted towards the organisation. Companies with robust financial
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Illustration 1: 10 years cash flow chart of Amazon
(Source: Fox, 2014)

performance able to generate more and more investors which eventually leads the organisation
towards growth and development. If a company is not able to show adequate amount of profits in
their income statements in annual reports, then the investors will probably tends to avoid in
investing in the company. In case of Amazon, due to lack of robust financial statement, investors
begins to lose their patience and tends to reduce the amount of investment.
Amazon investing huge amount in building warehouses, robots and data centres in order
to improve the organisational effectiveness. Thus, this gradually decreasing the revenue of the
company and patiences of investors (Adame, Koski and McVay, S.E., 2018). Financial analysts
perceive profits as an essential part of the organisation which helps business corporation thrives
in the competitive market and also and vital elements which works as magnet to attract the
investors. It indicates the performance ofa company throughout the year. However, sometimes it
is not necessarily applicable that higher profits mean more effective performance.
Many companies able to earn ample of profits and revenue through putting fewer efforts.
Profits is determined by the sales that covers all the cost involved in manufacturing the product
and other expenditure. In the analysis of financial data, investors and financial analysts consider
profits as the key element of measuring the performance ofan organisation (Frennea, 2015). They
utilised it for the comparison for past years profits and make judgement which helps in defining
the precise position of the organisation.
Amazon's approach sustainable or not in future
The management of Amazon prefers to invest more in buildings, machinery, computers,
information systems and robots in order to enhance the development of organisation. This
eventually affects on the profits and revenues of organisations and therefore affecting the
decisions of investors.
In order to sustain in the competitive environment, the management of Amazon is
thinking futuristic. Extra cash flow is good, but it is not sustainable. It exists only as long as
Amazon keeps thriving. The transformations in working capital in past year cease the growth of
Amazon to $541 million which is the cash flow that derived thereafter(Fabozzi and et.al., 2015).
Amazon's net income would likely rise as well, producing a source of sustainable cash
flow for the company. However, from the analysis of situation, it can be elaborated that the way
Amazon is going will show results in future but it cannot be considered as fully sustainable as it
is risking its patience of its investors. Investors want immediate results which should be seen in
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the annual report of company. Amazon has immense sales pitch but the numbers in cash flow
aren't quite what they seem.
CONCLUSION
From the analysis of the report, it can be understood that cash flow are those statements
which shows cash and its equivalents of a company. In this context, the critique of cash flow
statement of Amazon has been made in this report. Here, the perception of investors and analysts
in regard with profits are seen as performance measurement of company. The argument whether
Amazon's approach is sustainable or not has been made in this assignment. In this way, it can be
concluded that Amazon's approach is not fully sustainable but it will give fruitful results in
future.
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REFERENCES
Books and Journals
Adame, K., Koski, J.L. and McVay, S.E., 2018. Free Cash Flow Disclosure in Earnings
Announcements.
Auerbach, A.J., 2017. Demystifying the Destination-Based Cash-Flow Tax (No. w23881).
National Bureau of Economic Research.
Fabozzi, F.J. and et.al., 2015. IN SEARCH OF CASH‐FLOW PRICING. Journal of Financial
Research, 38(4), pp.511-527.
Frennea, C., 2015. Market-Based Assets, Value Appropriation Activities, and Cash Flow
Outcomes (Doctoral dissertation, Rice University).
Ma, K.C., Pace, R.D. and Stryker, J., 2015. Stock Valuations on Earnings versus Cash
Flow. International Journal of Business, 20(4), p.357.
Online
Fox, J., 2014. At Amazon, It’s All About Cash Flow. [Online]. Available
through:<https://hbr.org/2014/10/at-amazon-its-all-about-cash-flow>
The Big Number. 2011. [Online]. Available
through:<https://www.wsj.com/articles/SB10001424052970204524604576609740825745
286>
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