A company like Amazon is an interesting example of FCF vs. profitability. For years, net income hovered around zero, yet the stock was price quite consistently on a multiple of 20-30x Cash from Operations (and still is today). And FCF was not necessarily great over that period either, as capex spending on warehouses and data centres remained high. So it seems like investors assumed that as long as CFO kept growing strongly, the capex would get good returns in the long run and were willing to invest even if net income and FCF weren't delivering yet today. I'd be curious to know your take on this one. Thanks!
Great summary of the CF statement. I agree that large one off capital expenditures can be a flag, but I think it's not always bad and sometimes it requires a deeper dive to understand what the investment is in and whether it's likely to generate good future return (based on both past performance and understanding the details). If a company has consistently good cash return on investment and the new project makes good business sense then the higher capex might be a good thing? And it's the same with acquisitions too I guess; whilst these don't impact the FCF it can equally destroy the cash left over for shareholders if done badly. (big spikes in acquisitions should be another flag when looking at a cash flow statement, under the investing section)
A company like Amazon is an interesting example of FCF vs. profitability. For years, net income hovered around zero, yet the stock was price quite consistently on a multiple of 20-30x Cash from Operations (and still is today). And FCF was not necessarily great over that period either, as capex spending on warehouses and data centres remained high. So it seems like investors assumed that as long as CFO kept growing strongly, the capex would get good returns in the long run and were willing to invest even if net income and FCF weren't delivering yet today. I'd be curious to know your take on this one. Thanks!
Great summary of the CF statement. I agree that large one off capital expenditures can be a flag, but I think it's not always bad and sometimes it requires a deeper dive to understand what the investment is in and whether it's likely to generate good future return (based on both past performance and understanding the details). If a company has consistently good cash return on investment and the new project makes good business sense then the higher capex might be a good thing? And it's the same with acquisitions too I guess; whilst these don't impact the FCF it can equally destroy the cash left over for shareholders if done badly. (big spikes in acquisitions should be another flag when looking at a cash flow statement, under the investing section)
Thank you very much for these articles which I read as soon as those appear to inbox!
Thank you very much for explaining in a very simple way with examples.