February 19, 2015 2:56 pm

Amazon capital questionsOnline retailer would rather focus attention on free cash flowAbracadabra. Amazon does not make much profit and, perhaps for that reason, likes to focus attention on free cash flow. This metric, which is not a GAAP measure, is usually calculated as operating cash flow less capital expenditure. That came to $1.9bn   for Amazon last year.A big number, with some sleight of hand: it understates Amazon’s investment programme and overstates its cash generation. This is because the company has increased investment by using capital leases to buy assets. Last year $4bn in assets were acquired under capital lease — five times the level of 2012. This is nearly on a par with capex, which stood at $4.8bn last year. Capital leases are like a purchase that is financed by the seller. Amazon says the increase in CLOs is mostly due to technology investment for Amazon Web Services (read: server farms). About $2bn in principal repayments fall due this year.This is all in the annual filings in black and white. But capital lease repayments are not included in capex — they are considered financing flows, not investing flows. Therefore these principal repayments— $1.3bn last year — are not included when calculating Amazon’s primary version of free cash flow. The depreciation and amortisation of assets acquired under capital lease is included as a cost under operating expenses, but this is netted out when calculating operating cash flow, because depreciation and amortisation are added back in. (About $1.5bn of Amazon’s $4.7bn in D&A last year was due to assets acquired under capital lease.) All of this complies with accounting rules. Yet it distorts common sense. If principal repayments on capital lease obligations were treated like capex, free cash flow would have been $500m last year, and $1.2bn the previous year. If the assets acquired using capital leases were treated as capex, the free cash flow figure drops to minus $2.2bn last year. The most recent earnings report was the first time Amazon included these figures in its discussion of free cash flow.Amazon bulls will point out that negative free cash flow is nothing to worry about for a company that is growing fast — look at Walmart during the 1980s. Fair enough. Yet Amazon itself states   solemnly that “Our financial focus is on long-term, sustainable growth in free cash flow per share.” That trick has not yet been performed.