Amazon: We have great cash flow - it flows straight out of our hands Amazon's shares hit a record yesterday, despite well-disguised but nonetheless concerning full year financial results and fourth quarter profits. Investors were lapping up the giant etailer's shares after hours, pushing the stock up 8.7 per cent to $260.35. But their enthusiasm was somewhat confusing, as Amazon's yearly …
I'd go for a 'sell' right now. Price seems over valued so time to take profit and wait to see what happens.
You could use the cash to buy some Apple shares - after the recent fall Tim C will be looking to pull some short term stunt to wow to gullible analysts and get a spike ahead of the iPhone 6 later in the year.
Or like me, you could stick your cash in a bank account because I'm rubbish at gambling on the markets.
Bad cashflow kills companies dead. Granted, companies as big and prestigious as Amazon are unlikely to have much in the way of cashflow problems, but it's certainly not something to ignore.
Companies making a loss can keep going if they've got cashflow, giving them a chance to turn things round.
...but my point still stands. Juggle the figures how you like, but at the end of the day, PROFIT is what keeps the whole thing moving.
And it doesn't matter on the size of the company...merely on cash reserves and rate of expenditure.
When you're shedding cash, good cashflow and supplier management can only delays the inevitable. Inevitable being the point when your cash reserves can no longer pay wages, and chapter 11 beckons.
"Sorry no - profit is measured after cashflow is factored in."
So are you saying that cashflow should or should not be ignored? Are you disagreeing with me, and saying that you should consider cashflow (as you say, profit measured with cashflow as part of the thinking) or are you saying that cashflow should be ignored (which would seem to be ignoring your own words about how you should account for cashflow when thinking about profits)?
I'm saying that if you are making sufficient profit, how efficient your cashflow is becomes increasingly irrelevant.
if Apple have a bad month, say after paying all their corporation tax (hah!), it doesn't really matter, since they're raking in billions a years in profit. Multiple quarters in profit = huge cash reserves. Yes, it affects cashflow for that month, but so what?
Without profit all other financial mechanics (inc cashflow) eventually fail. Common sense, really.
PS: You said to ignore the cashflow. A company with cashflow problems can be making a huge profit and still collapse, rendering its shares rapidly worthless.
Sources & examples?
"PS: You said to ignore the cashflow. A company with cashflow problems can be making a huge profit and still collapse, rendering its shares rapidly worthless."
It's usually small businesses that suffer from it the most. Business sell a gazillion widgets, with a profit of a million quid. Payment is due in 90 days. There is no money in the kitty. Staff want paying now. Bank won't extend a loan. Staff leave because they haven't been paid. Without staff, company can expect to make no more widgets and can expect to die very soon. Creditors want their money. Company can't pay them either. Bankruptcy looms. Million quid profit turns up far too late to save company. Here are some more words:
"70% of businesses which go bankrupt are profitable when they close their doors."
http://www.finpacific.com/statistics.html
http://autosandeconomics.blogspot.co.uk/2012/11/gm-bankrupt-again-in-3-12-years.html
Ok...so your company had:
- no reserves
- made no widgets at a profit until this million order
- Already had credit facilities and creditors
Yes, it failed because it could not pay the staff. But this is only the ultimate failure point for a business that was already in trouble, and was using cashflow to postpone failure. Had the company been profitable *before* the million widget order, it would not have failed - simple as that.
Second, banks are now specialising this type of loan:
http://www.barclays.co.uk/Businessloansoverdraftsandmortgages/Businessloansoverdraftscashflowfinanceandmortgages/Cashflowfinance/P1242597792294
"Had the company been profitable *before* the million widget order, it would not have failed - simple as that."
Not quite. Had the company* significant cash reserves* it would not have failed. If you make a huge profit and plunge it all into expenditure as fast as it comes in, you're vulnerable to this, even though you're vastly profitable. Amazon appear to be plunging their money into expenditure.
"Second, banks are now specialising this type of loan:"
Yes they are. They still sometimes choose not to lend.
You are conflating revenue with profit. Profit only occurs AFTER investment expenditures are accounted for. An executive can argue that cash on hand should be invested instead of being held in reserve or distributed as profit, and an investor can agree with that strategy. But it is a risk, and it explicitly forgoes profit.
Yes, there are some businesses that have stable long term potential profits against short term volatile costs. They are all highly regulated: banks, pharmaceuticals, oil and gas production companies. In fact they are so regulated I don't regard them as businesses, but quasi-governmental agencies.
Just a quick point - you can make a loss many times (IBM, MSFT last quarter etc.) but you can only run out of cash once. At that point you are bust. Dead. Game over.
Ignore cashflow at your absolute peril.
The maxim for accountants is "Cash is king. Sales are vanity, profit is sanity, cash is reality".
I assume you'll be paid in profits this month rather than cash then?
Also, cashflow gives you a clue when the profits figure has been made up. If a company claiming to make large profits has negative cashflow, then you need to wonder why.
Isn't that what Global Crossing and Worldcom were doing back in the dot.com bust? Doing data traffic swaps with each other and booking it as profitable revenue, when all they were actually doing was swapping cash between them?
I looked at AMZN back in May and giggled at what I found. No dividends ever, and no plans to start one that I could find, so the only value it has is in capital growth - that is, hoping that you find someone to sell it to later who ascribes a higher value to it. Whilst that's by no means impossible, as Amazon seem to still be in the "grow as big as we can by doing everything we can thing of" phase and maybe one day they'll decide they're big enough and start providing some actual value to the stockholders, there are better options to be found. I put my dosh into ARM instead, which is a company still growing AND actually has a dividend (small, granted, but it shows their heart is in the right place i.e. giving me money). They're up 70% since then, which I promptly splurged on hookers n' coke.
I think this is largely beside the point. Dividends are what companies do when then don't have any ideas on how to grow any more. Going by this reasoning, it was a bad idea to buy Apple stock in 2004 or 2005, because they were not giving out a dividend, and (at the time) they certainly had no plans to start one, busy as they were investing in new products.
I disagree; dividends are a very important part of consideration in any stock purchase. The example I used in my original post, ARM, is also still growing. Still pursing new products, still chasing markets, and also has a dividend. Each time their profits go up, they jack up the dividend; making the stock worth more not on speculation of future improvements, but because it's giving the stockholder more cash right now and carries the implication that there will be increased cash for stockholders in the near future.
A company could grow forever but if it never handed out any dividends, the stock would be useful only in the hopes of finding a greater fool to sell it on to, or for someone deciding to take control of the company through stock purchase.
A lot of US companies don't pay divvies. It seems to be a standard thing (especially in the tech sector) - and I think it's partly down to the tax treatment of dividends. As I understand it, It's more tax-efficient to make your profit on stock price increase than it is to take cash in dividend payments. So shareholders often seem happy to accept these huge cash-piles doing nothing very much.
If Tim Worstall were here, I'm sure he'd say that's a clear case of taxation distorting the market, and harming growth. Companies are going to be less likely to invest their cash piles as well as if that money was being used for something productive. Admittedly Tim Cook used something like $10bn to pre-purchase lots of stuff in the supply chain, thus making more profits on the iPhone/iPad, but the other $90-odd billion is probably less well used.
"It seems to be a standard thing (especially in the tech sector) - and I think it's partly down to the tax treatment of dividends. As I understand it, It's more tax-efficient to make your profit on stock price increase than it is to take cash in dividend payments. "
Kind of agreed, by which I mean, I agree that it doesn't have to involve dividends, but it's still a way of giving the stockholders a share of the profits and a company with a record of doing this should be viewed similarly to a company with a dividend history - it's an alternative way of handing out the profits. You can give people cash directly (dividend) or increase the value of the stock they hold by using those same profits to buy stock back. It amounts to the same thing - using the profits to give money to stockholders - but by a different route.
Alfred,
Yup, I agree with you. Stock buy-backs are the option that is allowed, and that's the route Apple always took before. Although didn't they pay their first dividend last year? I find it odd. I worked for a US company who actually proudly stated on their investor page on the website that they'd never paid a dividend. As if that were a good thing... Some companies need to remember who's money it is (a point I made below).
Apparently, according to Messrs Miller & Modigliani, dividend versus capital growth is irrelevant to an investor.
See the seminal paper - Miller, M.H. and Modigliani, F. (1961), “Dividend policy, growth, and the valuation of shares”,
Journal of Business, Vol. 34 No. 4, pp. 411-33
A paper debated now for about 51 years.
Of course, why and in what you would choose to invest is up to you and your personal circumstances.
re. dividend versus capital growth. More recent (linked from) research show that dividends do matter. In practical terms it is money now versus the promise of future growth. The US approach of taxing stock sales at 15 % as capital gains and dividends as income (often > 30 %) is indeed an unhealthy distortion.
A really interesting article in that link, which backs up what "feels right". The paper is quite involved, but has this lovely conclusion "We did not start out trying to forecast gloom and doom. We started out by looking at the optimists' assertion that today's low payout ratios are a strong positive signal for future growth. Unfortunately, this view is emphatically inconsistent with the historical evidence."
There was also a paper (Stanley Paulo, Chris Gale, (2012),"The Miller-Modigliani 1961 Ponzi scheme, alias "dividend irrelevance"", International Journal of Law and Management, Vol. 54 Iss: 3 pp. 234 - 241) about the M-M formula actually equating a Ponzi scheme which is quite entertaining. At least as entertaining as highly technical accounting papers get. Which isn't very.
So long as dividends and capital growth have equal tax treatment that is true. If the tax environment is such that dividends net a lower profit than capital growth, companies will prefer capital growth over dividends. Also on a practical level dividends tend to be paid by companies in mature markets whereas growing markets tend to attract capital growth companies (for obvious reasons).
>As if that were a good thing
Paying a dividend says "we think we would be better returning this money to our share holders so they can invest it - in another company", not paying a dividend says "we think we can use this money to grow our business and it's share price"
Paying a dividend says "we think we would be better returning this money to our share holders so they can invest it - in another company", not paying a dividend says "we think we can use this money to grow our business and it's share price"
Up to a point Lord Topper, up to a point...
Apple's cash pile is around $100 billion. They're not known as a company that makes big acquisitions. They've used large chunks of that cash to help grow, by buying up all the iPad sized touchscreens in the world for example, which I believe they did when the iPad 1 launched. At that point they only had about $50 billion in cash.
They didn't return that money then, nor did they use it, they simply grew it. And massively grew the company. They could plausibly launch an Apple TV and go mainstream in PCs at the same time and barely touch that cashpile, but hugely expand of the company. So the correct thing is to return it to shareholders somehow, and reassure them that you plan to grow the company some more.
Or, alternatively, say we're in a mature market now, we plan to expand slowly and look for new markets, but we're not seeking growth for the sake of it, and risking profitability. Growth is important, but profits are king, and growth often leads to a lack of profits.
It is a clear case of taxation distorting the market. In this case it isn't harming growth, it actually promotes it; but at the cost of clear market signals on the health of the company. At least that was the case pre-Obama. In the current environment of government confiscation of wealth I would say it is stifling growth and job creation because instead of opening new lines of business, companies are hoarding cash just like Apple is.
We may dislike companies individually but the situation at Amazon is more or less consistent with Bezos' way of running the company. He has time and again shunned profits for the sake of expansion. His track record shows that he's usually right.
If anything, I'd characterise events as "same-old same-old" rather than either buying or a selling frenzy.
As for the profit or loss, when we're talking such marginal sums as 39M on 21B of sales, I'd hazard a guess that a lot of this structured and designed in such a way as to avoid having to pay any taxes. The loss figure is uncomfortably close to 0 be taken seriously.
I'm sure more financially gifted individuals than me could dig into their accounts find "royalty payments" or "consultancy fees" or some such gobbledygook that siphons off most of the profit.
The tax games are to avoid corporation tax in various countries they operate in. If the overall company is not reporting profits to its shareholders, and siphoning off the cash into royalties/consultancies or somewhere, then they're committing fraud, which is rather different!
You're right to say that Bezos likes to expand. But perhaps he's forgotten who he's working for? I'm sure he's well paid, and has tremendous fun, and has no personal reason to care about profits. But at some point, the company needs to make serious cash. Making $20 billion of sales and close to rounding errors of profit is a total waste of time and money. You can get a 4% return putting your money into the bank (assuming it doesn't go bust), and inflation is around 2-3%, so you need to make at least a 4% profit to be worth investing the cash at all. You might argue 7-10%, if that's what you could get putting your money into a tracker fund. If you spend 20 years growing the business and making nothing, then after 20 years you're then going to need to make obscene, insane profits for the effort not to have been a waste of the shareholders' money.
Admittedly man does not live by bread alone, and you might argue Amazon are building something useful. But Bill Gates can do that, because he's spending his own money on his own projects. Jeff Bezos is currently playing with other peoples', so it's their trainset, not his. That's the downside of taking your company public, you're no longer supposed to control it. It's also the danger of companies like Facebook, where Zuckerberg has controlling shares, but not a controlling financial interest. His company structure wouldn't be legal in the UK, because he gets to outvote the actual owners of the company. I think he owns about 10%, but has over 50% of the voting stock. Google have similar lopsided voting rights, but not as mad as that.
Turtle_Fan,
Murdoch and family are large minority shareholders, with a successful history running things, so you need to get a large group to outvote him. There have been rumblings about that though. There's also a Saudi guy (not sure if privately or as representative of an investment group) who's close to Rupert, and I think their combined holdings get pretty close to 50%.
Obviously someone's got to run the company. If they're a major shareholder they're also hard to get rid of. CEOs always get disproportionate power. That's called the 'agent problem' by economists I believe. You can give the CEO stock (if they don't already have it) to try to align their interests with the shareholders, but the problem is they're often also getting paid, and after a certain amount people aren't always motivated purely by money. Or they'll irrationally prioritise the short-term bonus over the long-term value of their shares. I guess that's less likely with founder-CEOs, as they're more likely to care about the company they built, but are also more likely to see it as a personal plaything.
Not fraud - but part of that "not making any profits" was buying $1.5Bn of securities, which they presumably hope to sell for a profit at some point
It's just like saying, we made $1.5Bn but bought $1.5Bn worth of gold - therefore we didn't make any profit (and don't pay any tax) but we do own $1.5Bn worth of gold.
Not fraud - but part of that "not making any profits" was buying $1.5Bn of securities, which they presumably hope to sell for a profit at some pointIt's just like saying, we made $1.5Bn but bought $1.5Bn worth of gold - therefore we didn't make any profit (and don't pay any tax) but we do own $1.5Bn worth of gold.
That bit wasn't in the article when I commented. But I'd be surprised if they aren't buying those investments with reserve cash on hand. It would be a strange piece of accounting to buy an investment with profits and claim not to have made any. Unless investments are part of the business of the company. There are plenty of ways to shift profits between years, although that's usually done to give smooth growth and keep the markets happy, or for 'kitchen sinking' all your losses into one quarter, not to make a small annual loss, and annoy shareholders.
The reason I used the word fraud was in comparison to making payments to another company and calling it franchise costs. The company with the shareholders should be the one holding the IP, as the profit is supposed to go to the owners (shareholders). Paying for use of IP to the parent company, seems to be a standard way to avoid corporation tax in subsidiaries in other countries.
We're in a new world now where banks pay between 0 and 1%.
Indeed, how could a retail-banking investment pay 4% when mortgage rates are below that (in the US)? Where would the banks be investing your savings to get that return?
And in any case, the interest on consumer cash savings can't be very far from the rate of inflation, because in order to pay it banks have to make loans and collect interest, and in doing so they increase the money supply.
Prior to the S&L crisis banks could pay around 5% on consumer cash savings because inflation was rampant and interest rates were ridiculous all around (because Volker was trying to cut inflation). In 1981 the US 30-year mortgage rate hit 18%. (It's in the 3-4% range these days.) Those rates created a finance bubble that precipitated the S&L crisis (with help from other quarters) and a real-estate bubble that burst around the same time.
I'm not too sure on your question, but in general...
A company is taxed upon its profits in the country where those profits are recognised.
If you make £100 in a country with a corporation tax rate of 80%, then you hand over £80 to that government. You may notice that the next door country only charges 5%. So you open another company in that country, and send a bill for "licensing" or "management fees" to the first company of £99.99. Now the first company makes a profit of 1p, which is taxed at 80%. Good luck collecting that. The other company (assuming it has no other costs) has a profit of £99.99, and pays tax at 5% (so about £5). Total tax bill - about a fiver. Would you rather pay £80 in tax or £5?
That's sort of what Amazon, Starbucks et al stand accused of in the UK, and that's probably why you describe them as efficient. They use low taxation regimes to pool profit, reducing the overall tax bill. Sort-of. it's far more complicated than that, but you should get the gist of it.
Amazon made a loss last year. Losses are not taxed, in that you don't get tax back if you make a loss, but you (in many jurisdictions) carry the loss forward to net off against your future profits, reducing your future tax bill.
Does that make any sense?
Otherwise "efficiency" could mean sales per $ of capital (it's called an efficiency ratio).
You forgot the important bits for US companies. For Apple in the UK they first have to pay the UK tax, then the company pays the US tax, and then the shareholder pays either an income (dividends) or capital gains (sale of stock, not indexed for inflation) tax. So that $100 in initial profit winds up being $1.25 to the US shareholder. Not really an attractive rate of return.
I love articles like this. Financially illiterate. Sure, do the "Investing for Dummies" top line analysis but miss the point. It's great you are going to encourage the price to dip so I can buy more. This time last year the same story: sell Amazon, earnings not there!!! And the stock dropped quite a bit down to ~£190. I bought a ton.
A quick look at the 10-K shows Amazon was investing. It's earnings were down last year because it's purchases of kit rose from $1.7bn to $2.9bn. Good lord, a company actually investing for the future. What a shocker! And the same is true this year. There's no profit because purchases are up from $2.9bn to over $4.5bn. Where's all that kit going? My guess is all those data centers around the world cementing Amazon's position as leader in the cloud computing space.
And consider the awesome financial management that allows an organization to report a tiny loss on sales of $69bn. That loss is 0.05% of its net sales. Oh, and it increased cash generation to over $8bn.
Please, please, sell. Knock that price down some so I can get some more. Please.
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