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Technology Stocks : Internet Analysis - Discussion
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To: Edwarda who wrote (310)4/9/1999 11:43:00 AM
From: Chuzzlewit  Read Replies (1) of 419
 
Edwarda, I never beat ladies. Besides, I like the succinct way you put it!

I think the issue is that they both useful in the right context. Free cash flow is an improved accrual system because it incorporates a sinking fund into the the cash out section. This is designed to account for the necessary replacement of assets over a reasonable period at current borrowing rates. So instead of depreciation you have the sinking fund. But it isn't a good surrogate for economic profit. So I really like your characterization in terms of flexibility. Normally this measure is sufficient and desirable, I think, for most analysis.

But the problem arises for companies with large floats -- i.e. companies in which the movement of cash is widely separated from the underlying event -- because you get an ineviatble distortion, That's what happens with companies with very low CCCs. And AMZN has about the lowest CCC I've ever seen. So here, I think I would prefer EBITDA as a measure of operating cash flow. That way we get to try to do a bit of matching while eliminating non-cash charges.

Bottom line is I think I you need to be flexible in your choice of analytical tools. And for the e-commerce company I think that none of the tools is sufficient by itself. I'm looking at the company's cash flow and trying to invent a decent tool for capturing the essence of the company. I can do it with spreadsheets and financial modeling, but the problem is how to distill that down to a few meaningful metrics.

I'll let you know if and when I figure out something makes sense.

TTFN,
CTC
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