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There are some issues with this explanation. The main issue is that the rules of accounting have a very good provision to take into account investing into the f
by hristov 13y ago
There are some issues with this explanation. The main issue is that the rules of accounting have a very good provision to take into account investing into the future. It is called capitalization.
Thus, if a company spends money to build or acquire a new asset, it is called capital spending and it is not subtracted from the profits. Thus, for example, if a company had a million dollars of profit and decided to spend these million dollars on a new fulfillment center, they could spend the money for their fulfillment center and still report a million dollars in profit.
So it is not quite clear-cut to say that Amazon's desire to build fulfillment centers around the world is costing them their profits. Those things should be capitalized and once they are capitalized they should not affect the profits. Amazon did in fact report significant capital spending (as one can see on their cash flow statement).
However, things are not that simple. Sometimes some expenses which are about building for the future and investing into new growth are not capitalized. This is the case because for some expenses the benefits are so uncertain and difficult to quantify that the SEC requires that they are reported as ordinary expenses instead of capital spending. These types of expenses tend to involve R&D and may include certain administrative expenses associated with growth initiatives.
Therefore, many companies that are trying to grow do report lower profits because they have those expenses that are associated with investment into future growth but are not capitalized. This may be the case for amazon. But it is a question to what extent it is the case for amazon. For example, they do capitalize software and website development for new products and websites. So one cannot simply say that they are showing losses because they are spending all the money on making great new products. But then again, they expense software development for existing products. So perhaps the losses are associated with new growth features that are built into existing software.
So all in all it is a big muddle and it is not at all clear whether amazon is an inherently highly profitable company that happens to be investing in the future, or they are wasting money, or their business model is just not that profitable.
- pbreit 13y agoCan you explain how capital expenditures do not affect profits? Doesn't capitalization just mean that expenses are applied over time? They don't disappear, correct?
- 001sky 13y agoAmazon has ~no profits before taking into account the ways that Capex (might) impact profits.
- moca 13y agoYes. Capital expenditures don't disappear. You can buy a piece of land to build a warehouse. You can sell the land to get money back if needed, so you can't report the money for the land as loss.
- MaysonL 13y agoLast quarter, Amazon had 834M of depreciation, and 281M of stock-based compensation: 1.1 billion of non-cash deductions from revenue. They made capital expenditures of 1.03 billion. They ended the quarter with about $100 million more cash than they started with.
- cperciva 13y ago281M of stock-based compensation ... ended the quarter with about $100 million more cash than they started with. This looks like a loss to me. They could have sold $281M of stock and gotten $281M in cash; instead they ended up $181M short of that.
- michaelt 13y agoIn general when you're a CEO or board member you'll make more money by granting yourself $x million in stock than you'll make by paying a dividend of $x million which has to be shared among all investors.
- fauigerzigerk 13y agoThat's all true, but Amazon is free cash flow positive. So it's not like they're making huge "losses" after deducting capex.
- chronic25 13y agoThere are too many MBAs on Hacker News now adays
- fspeech 13y agoThe fcf for retailers can simply come from paying suppliers later than getting paid by customers. While a cheap source of capital (even this is doubtful), not exactly a winning strategy in the long run. The fcf will stop once revenue growth slows. As capital it is only cheap in the sense that you don't have to constantly raise equity for growth. Without earnings your equity base can't grow w/o getting more from shareholders.
- epa 13y agoOnly ignorant investors can get fooled by large account payables. It's not a source of capital..
- fspeech 13y agoIt is if it is stable enough (that is the negative working capital). In other settings (such as insurance) it is also known as float. Negative working capital is great if you can get it and keep it. The problem with the associated fcf is that the fcf is the derivative, literally. So if the working capital stops going more negative the associated fcf goes to zero.
- craytheon 13y agoFree cash flow is falling in the last couple of years. http://i.imgur.com/sJWam5L.png http://i.imgur.com/sJWam5L.png
- pmarca 13y agoThe accounting rules (GAAP) have only a loose correlation to how most modern large companies actually operate the levers of their businesses. Management teams of well-run companies spend very little time thinking about the formal financial statements. Accounting bears the same relationship to actually running a business that the Efficient Market Hypothesis does to actually effectively investing -- which is to say, almost nothing.
- cynicalkane 13y agoGAAP book value and GAAP earnings are definitely correlated with stronger returns for shareholders. Which seems to call into question the efficient market hypothesis, but says good things about GAAP.
- zero_intp 13y agoWhile I agree that GAAP only vaguely represents reality, Management teams of all well run companies /DO/ think about formal financial statements. These statements require thought or liability to potential jail time. In addition, the impact of these statements on financial markets (ie: stock price) is tremendous. Management damn well should be thinking about shareholder value.
- mistermann 13y ago> liability to potential jail time Are there any examples of this? It seems to me the SEC didn't make much use of all the archived emails (guaranteed to be in place due to SOX) during the 2008 banking crisis which makes me generally distrustful of these formal written rules.
- asmithmd1 13y agoYes, WorldCom leaps to mind http://www.accounting-degree.org/scandals/ http://www.accounting-degree.org/scandals/ They misstated costs as investments and were able to show big profits - for a while.
- 13y ago
- chrisgd 13y agoThe majority of the article talks about free cash flow which takes capex into account. And capex does impact the p&l once it is built and being depreciated.