Lockeon, I have been beating the drum about free cash flow for some time, however, the article errs in several respects. While it is true that Free Cash Flow (FCF) gives a a good view of the growth engine of a company, it can also be terribly distorting, and that is exactly what is happening with AMZN and BKS.
Here are a couple of reasons why:
1.AMZN is in negative operating cash flow (which is basically operating earnings + depreciation) before balance sheet adjustments (less decrease in A/R plus increase in A/P etc.) That's important because it focuses on the ability of a company to eventually generate cash flow from operations. Using the Fool's uncritical approach, one would conclude that a Ponzzi scheme was a solid business. This is not a frivolous statement; just look at the pattern of A/R and A/P at AMZN to see what I mean. By contrast, BKS is in positive operating cash flow.
2. Investments for new plants or stores can be terribly distorting to the cash flow picture because the way the Fool accounts for them they are ongoing expenses, but in point of fact they are discontinuous events with certain lifetimes. For example, if a store is expected to have a useful lifetime of 10 years then it would make sense to amortize the cost of the store over that period of time (using an appropriate interest rate). This approach is really designed to annualize the replacement costs of existing facilities and is called a sinking fund. BKS has been growing at a very rapid rate, and the misuse of FCF (by the failure to generate sinking funds) distorts the situation.
*****
Now to Dell. Dell is one of the best cash generating machines around because of Tom Meredith's focus on minimizing what he calls the CCC (cash conversion cycle). Basically the CCC is the days' receivables + days' inventory - days' payables, with the smaller the number the better. On the surface this looks much like AMZN's situation, but there is one very important difference: DELL is in strongly positive operating cash flow.
TTFN,
CTC |
