2004 – Free Cash Flow

This is the first time we’ve seen charts or visualizations of any sort in one of Jeff’s letters. As someone who does not have a background in finance, I’m parsing this as a complete layman. The overall point is to illustrate Jeff’s defense that free cash flow is what investors should be looking at, not a standard income statement. He goes into quite a bit of detail, including examples.

I’ve outlined the main term used: free cash flow. I had to look that one up because Jeff makes it apparent that it’s important. He’s said it may times, but he makes it clear that this year’s letter is all about free cash flow.

I had to go a couple hits down in Google to find a definition that was not riddled with finance terms. I landed on Investopedia:

Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow (FCF) is the cash left over after a company pays for its operating expenses and capital expenditures, also known as CAPEX.

Well that sounds like profit to me – what’s the difference? I found an article on Fundera to explain just that.

A company can have negative cash flow while having a large profit if the owners take cash out of the business to pay personal expenses or use it to make investments or loans to others.
A company can have positive cash flow while having no profit if the cash comes from sources other than income, such as when an owner puts in their own money or if they take out a loan.


“This focus on free cash flow isn’t new for Amazon.com. We made it clear in our 1997 letter to shareholders—our first as a public company—that when “forced to choose between optimizing GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.” I’m attaching a copy of our complete 1997 letter and encourage current and prospective shareowners to take a look at it.” — Jeff Bezos