The following is a reprint of a post found on the 'Motley Fool' message bords. The author goes by the name "rimpinths", and is one of the best readers of a balance sheet that I have encountered. his post was in response to one of the MF's analysis of AMZN's balance sheet...........find the board at boards.fool.com
I appreciate your comments about the growth in Amazon's current liabilities during the last quarter. I agree with your statements that this is not necessarily a bad thing. In most cases, it is good financial management. Why pay for something now when you can pay for it later? You'll have the resources to exploit other opportunities that may arise in the meantime.
I even read over some of your statements about financial management in in your "Cash-King" article. I find it contradictory that you would apply the Cash-King criteria to Amazon even though you state, "We don't look for cash-king companies with anything less than $1 billion in annual sales." You go on to discuss current liabilities and you state, "Those are the bills that have to be paid in the next year, and we'd like the company to be strong enough to hold off those payments as long as possible." After reading your article, the impression I received was that a company would have to meet the first criteria before the second criteria would be useful.
When talking about Cash-King companies, you mention names such Coca-Cola, Microsoft, and General Electric. For companies like these, yes, it is a good thing to have a high current liabilities balance. They have a steady stream of profit and they won't have any problem paying back any outstanding short-term balances. With no earnings to date, and none likely in the near future, unpaid balances are a much more serious issue for a company like Amazon.
You also state in your article that Coca-Cola has $947 million in long-term debt and sales of $4.95 billion during the 3rd quarter of 1997. This ratio of LT debt / sales is about 0.19. Compare that number with Amazon for the 4th quarter: LT debt / sales = $76.5 million/ $66.0 million = 1.16. (And that's during their most favorable quarter of the year!) Amazon has a LOT more long-term debt to worry about than Coca-Cola does and any rise in current liabilities should be examined with more skepticism. All your arguments in favor of high levels of current liabilities are applicable only to Cash-King companies like Coca-Cola. They are a different matter altogether for a small, unproven company like Amazon.
Moreover, the ratio you calculate in your post, (current assets - cash) / current liabilities, isn't really applicable to a company like Amazon. Amazon's $109 million in cash consists of about $75 million of long term debt and the rest is the remainder of the IPO. None of it is earned money. You mentioned that cash is oxygen to a company. A company like Coca-Cola breathes in oxygen on its own; Amazon is having oxygen pumped in by means of a life support system. Big difference.
It also makes sense for a company like Coca-Cola to hold onto $2.2 billion in cash at the end of the third quarter because its expenses for the quarter were about $2.05 billion. On the other hand, Amazon was holding onto $110 million in cash after the fourth quarter, even though their expenses were only $23 million. What's the point of holding so much cash? I'd really begin to question Amazon's management if all that cash shows up on next quarter's report: that's a lot of money borrowed at junk bond interest rates that's sitting around doing nothing. It's not needed to pay day-to-day operational expenses. If it's not being spent, it needs to least be invested. (Incidentally, I
didn't see any expenses related to the new Delaware warehouse. Where is that buried in the quarterly report?) In my opinion, your cash analysis is facing a lose-lose situation: either Amazon doesn't comprehend the time value of cash, or they do and those ratios you calculated are going to look a lot worse next quarter.
In any case, the concerns I raised about the rise in current liabilities deal more with Amazon's operational efficiency than with their cash management. It seemed odd to me that current liabilities
would grow 120% even though revenue only grew 74%. If you look at a company like Coca-Cola, current liabilities and revenue grow at roughly the same rate. As I mentioned in my post, the rise in current accounts concerns me because it seems that many of the expenses in the fourth quarter were buried under this heading. Like you, I'm more interested in Amazon as a business, rather than AMZN as a stock. I'm more curious about this company's five-year performance than with next
week's stock price. It's hard to gauge Amazon's performance when there is a sudden jump in current liabilities. Many goods and services received by Amazon that was previously paid as an expense are now suddenly "accounts payable" or "accrued advertising." Where does one begin to peel back the layers and find the truth?
If current liabilities grew at the same rate as revenue, at 74% rather than 120%, they would total about $34.7 million instead of the reported $43.8 million. That's $9.1 million in goods and services that were considered expenses before. Now there not. Why the change and what significance does it have? If they would have been expenses, as they were before, that EPS of $(0.39) suddenly turns into $(0.79). That's something to consider.
(In all fairness, if we apply the same reasoning and compare Q2 with Q3, EPS would have been $(0.19) instead of $(0.36) for the third quarter. These differences tends to swing back and forth, in favor and against, which is why Q-to-Q comparisons aren't really valid. However, the difference this quarter is more significant than in the past.)
Like I said, my interests are the same as yours: to decipher the balance sheets and understand Amazon as a business rather than asa stock. I'm still not sure what to make of their latest quarterly report. If you look at the income statement, it seems that their operational efficiency has improved conisderably from the last quarter. (Still very far from profitability, but at least moving in the right direction.) If you consider the balance sheets, there's a different story. Anybody who knows the real story, please speak up!
Rimpinths |
