Bezos' Focus: Free Cash Flow

Why does Jeff Bezos focuses on free cash flow per share?

Jeff Bezos, the founder of Amazon, has emphasized the importance of free cash flow per share as a key financial metric for several reasons:

1. Long-term Business Health: Free cash flow (FCF) is a measure of a company's financial performance and health. It represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. This is crucial for long-term business sustainability, as it indicates the company's ability to generate more cash than it uses.

2. Investment and Expansion: With a strong FCF, a company can invest in growth opportunities without needing external funding. This is particularly important for a company like Amazon, which has historically prioritized growth and expansion into new markets and product lines.

3. Shareholder Value: Focusing on FCF per share can be more indicative of shareholder value than just net income or revenue. It shows how much cash the company is generating relative to the number of shares outstanding, which can be a more accurate reflection of the company's value and efficiency.

4. Flexibility and Resilience: Companies with higher free cash flow are generally more resilient to economic downturns. They have the flexibility to manage through tough times without the pressing need to secure external financing.

5. Indicator of Efficiency: FCF can be a measure of a company's operational efficiency. It demonstrates how well a company is managing its resources to generate cash.

6. Attracting Investors: Investors often look at free cash flow as a key metric when evaluating a company. A strong FCF per share can make a company more attractive to investors, as it suggests the potential for dividends, stock buybacks, or reinvestment in growth opportunities.

Bezos' focus on free cash flow per share aligns with his long-term strategic vision for Amazon, emphasizing sustainable growth, operational efficiency, and maximizing shareholder value.

Give me an example where earnings per share might be misleading, but FCF per share might be a more accurate representation of a company's health

Earnings per share (EPS) can sometimes provide a misleading picture of a company's health, particularly in cases where non-cash expenses significantly affect net income. Here's an illustrative example:

Hypothetical Scenario: TechStart Inc.

Background:

• TechStart Inc. is a technology company that has recently invested heavily in research and development (R&D) to develop new products.
• These investments have resulted in substantial amortization and depreciation expenses, which are non-cash charges.

Financials:

• For the fiscal year, TechStart Inc. reports a net income of $2 million.
• The company has 1 million shares outstanding, resulting in an EPS of 2 (2 million / 1 million shares).

Analysis:

• Earnings Per Share (EPS): The EPS of $2 might initially seem low for a tech company, suggesting modest profitability. The substantial R&D expenses, which are non-cash charges, have significantly reduced the reported net income.

• Free Cash Flow Per Share (FCF/Share): However, if we consider the company's free cash flow, the picture might be different. Let's say the non-cash expenses (amortization and depreciation) total $5 million. The actual cash flow from operations might be much higher than the net income suggests.

  • If the operational cash flow is 7 million (net income of 2 million + non-cash expenses of 5 million), and the capital expenditures are 2 million, then the free cash flow is 5 million (7 million - $2 million).
  • The FCF per share would then be 5 (5 million / 1 million shares).

Conclusion:

• EPS View: From an EPS perspective, TechStart Inc. appears to have modest profitability, potentially leading to concerns about its financial health.
• FCF/Share View: However, the FCF per share indicates a much stronger financial position. It shows that the company generates significant cash flow from its operations, more than what the net income alone suggests.

In this scenario, the EPS might be misleading due to the large non-cash expenses that are impacting net income. In contrast, FCF per share provides a more accurate representation of the company's ability to generate cash, which is a critical factor for growth, investment, and overall financial health.