Cloud Computing: Amazon.com Inc. Is Losing More Money Than You Think

Grazed from Fool. Author: Timothy Green.

Amazon CEO Jeff Bezos has long pointed to the free cash flow, not the net income, as the best way to measure the health of his online retail empire. Even as Amazon’s net income has turned negative in recent periods, free cash flow has remained at a seemingly healthy level. Most bullish arguments for Amazon ultimately boil down to pointing out this fact — that Amazon is still managing to generate cash despite the losses that it’s reporting on the income statement.

But here’s the thing: A company that’s growing rapidly and investing heavily in its business through capital expenditures should be burning through nearly every dollar that it brings in. How has Amazon been able to do exactly the opposite, recording multibillion-dollar free cash flows despite its heavy investments? The answer? Accounting gimmicks…

Pulling a fast one with capital leases

A company’s free cash flow is simply the operating cash flow, which is all of the cash generated from operating the business, minus the capital expenditures, which is the cash used to buy property and equipment. When a company makes a capital investment, such as building a new distribution center in Amazon’s case, the full cost is subtracted from the operating cash flow as it’s spent in order to arrive at the free cash flow…

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