Inc. (NASDAQ: AMZN), a dominant player in online retail, is best known for its persistent pursuit of sales and market share, even at the expense of profits. Ongoing large investments of capital expenditures to support constant business expansions can really ratchet up costs over time and put pressure on earnings. The company's ever-increasing expenses on research and development to promote innovation and the Amazon brand may have made its earnings situation more challenging. However, investors have mostly rewarded Amazon stock over the years, despite its lack of earnings and occasional losses.

The market has instead focused on other aspects of the company, one of which is its solid cash flow. While profitability is an ultimate goal for any company, a strong cash position helps ensure a business can operate smoothly by paying all of its bills on time. Cash flow and earnings are two financial measurements that provide different valuation perspectives to investors. Companies may make money, but still be cash-strapped and unable to meet certain investment needs to achieve long-term growth. However, with enough cash flow, especially from operating activities, a company may become prosperous in the long run.

Operating Cash Flow

Operating cash flow can be regarded as the most organic cash source, and is generated from a company's normal operating activities. A company may also sell investments or assets for cash, but investing activities are outside of a company's main operations, and the resulting cash flow does not measure its ability of producing ongoing cash flow to support capital expenditures or business acquisitions. Amazon's operating cash flow increased from $3.9 billion to $11.9 billion between 2011 and 2015, thanks largely to its continued sales expansion. Certain one-time expense items, such as stock-based compensation, are costs to earnings without actual cash disbursements, and thus can be added back to cash flow on a non-GAAP basis.

Operating cash flow is largely about increasing cash receipts from revenue and reducing, or delaying, cash disbursements for various expenses. For example, if a company can keep accounts receivable low and accounts payable high, the net result is a larger operating cash flow. Amazon has consistently kept its new accounts receivable, or uncollected sales, at a low 1% of annual revenue since at least 2011. Meanwhile, the company has managed to delay some payments by using more accounts payable, reaching 6% of total annual expenses at times. The amount of cash Amazon had on hand totaled $15.9 billion at the end of 2015, a lot of which came from operating cash flow.

Free Cash Flow

Free cash flow is the operating cash flow left after paying for capital expenditures. It is a valuation measurement representing the cash available to shareholders. Investors often use the free cash flow yield to value a stock and estimate free cash flow returns from their investments. Free cash flow yield is defined as the amount of free cash flow divided by a stock's market capitalization. Amazon's free cash flow stood at $7.3 billion at the end of 2015, and its stock's market capitalization was $318.3 billion at the time, resulting in a free cash flow yield of only 2%, which is lower than its peers in the technology sector. With a market capitalization of over $300 billion, but a much smaller book equity of $13.4 billion and a price-to-earnings (P/E) ratio in the hundreds, Amazon stock is arguably overvalued relative to its amount of free cash flow. Investing in Amazon stock at this valuation level gives investors a much lower free cash flow yield than investing in other value stocks.

Cash Flow From Financing

To fully fund its rapid growth, Amazon has seen increases in its outstanding long-term debt over the years with continued bond issuance, despite efforts to retire old debt. Amazon's total debt ballooned from $1.4 billion at the end of 2011 to $14.2 billion by the end of 2015. Even if operating cash flow from Amazon's organic growth is enough to fund capital expenditures, the company would still have to continue its borrowing to roll over maturing debt from the past. For the immediate future, Amazon would have to use any available free cash flow to repay its outstanding debt before it could position its cash flow on more solid ground.