Amazon's margins, live
The three cash-flow sections and their healthy signs
| Section | What It Tracks | Healthy Sign |
|---|---|---|
| Operating | Cash from core business | Positive and growing |
| Investing | Capital expenditures, acquisitions | Negative (spending to grow) |
| Financing | Debt, dividends, buybacks | Depends on strategy |
The free-cash-flow formula
Free Cash Flow = Operating CF - CapEx
Compare Amazon's cash flow to its net income
What free cash flow lets a company do
When rising earnings hide falling cash
Going deeper: the cash-conversion ratio
Going deeper (optional). Up next: Cash conversion ratio: an earnings-quality tell — an advanced aside you can skip on first pass and come back to anytime. Continue when you're curious.
Going Deeper — Cash Conversion Ratio (OCF / Net Income). Multi-year CCR below 1.0 is one of the strongest tells of deteriorating earnings quality. Lucent's CCR sat near 0.4 for years before its 2000 collapse — net income kept climbing while operating cash flow stagnated, because revenue was being booked into accounts receivable that never converted to cash. AI prompt: "Compute this ticker's 5-year average CCR; compare to industry median; identify the year with the largest divergence between net income and OCF, and explain the driver."
Accrual accounting vs cash: why the two numbers differ
The income statement is built on accrual accounting: revenue is booked when it is earned and costs when they are incurred, regardless of when cash actually moves. The cash flow statement is built on cash actually received and paid. That difference is the whole reason the two statements can diverge. If a company ships product in December but the customer pays in February, accrual accounting records the revenue and profit in December, while the cash flow statement shows nothing until February. Depreciation runs the other way: it is a real expense on the income statement in a year when no cash leaves the building. Net income is an accrual figure resting on judgment calls about timing; operating cash flow is closer to the bank statement. This is exactly why a persistent gap between reported profit and cash flow is worth investigating — the accrual number can be shaped by timing choices the cash number cannot.
Sit with the ideas.
A company reports $5B net income but only $2B free cash flow. Should you be concerned?