The most bullish arguments for Amazon point to cash flows, as opposed to net income, to measure the health of the Amazon digital commerce empire. However, now there are some doubts that Amazon has really done what it appears to have - invested heavily in its business through capital expenditures while recording multibillion-dollars free cash flows.
A recent article in Motley Fool indicates that Amazon is pulling off this feat with nothing more magical than “accounting gimmicks."
The article argues that Amazon is actually investing far more in its business than it appears by financing some of its investments through capital leases. These leases give an exaggerated pictures of the free cash flow at Amazon, and makes it far less helpful a measure of the company's overall economic health.
A capital lease allows a buyer to, instead of paying the full amount for an asset up front in cash, finance the purchase over time. The buyer pays for it over time and only attains ownership when the debt is paid off. Amazon spent $4.6 billion on capital expenditures while financing another $3.4 billion through capital leases, meaning the company acquired about $8 billion in assets, but only showing $4.6 billion in capex. Because cap leases are treated as debt it appears on the corporate balance sheet as a line item in a budget or as a “long term liability”
Despite the novel financing, Amazon still gets to take a depreciation charge on the asset during this repayment period. This charge boosts the operating cash flow, thus boosting the free cash numbers.
According to the Motley Fool article, when Amazon’s capex is calculated more normally, “Amazon isn't generating anywhere near enough cash from its business to make the kinds of investments it's making.”