Why is EPS looked at much more than FCF/S (Free Cash Flow Per Share)

Question

I understand that eps is an important metric to look at when analyzing a company. (And I wont go into all the details of eps) But at the end of the day, the amount "you" have in "your" bank account, is FCF. So shouldn't FCF be more looked at. (AMZN is good example in its "beginning" years had low EPS and High FCF, due to its unique business model)

Answer 1

FCF typically refers to "free cash flow" and is a flow, not a stock, variable. So, there is no free cash flow at a point in time. FCF only exists over a period (month, quarter, year, etc.).

If you are referring to cash sitting on the balance sheet, that's simply an asset and one that is only responsible for generating free cash flow if it is required cash part of working capital.

Fundamentally value is driven by all future free cash flows discounted by the appropriate cost of capital, where free cash flow is defined as:

(Sales - Expenses - NonCash expenses) x (1 - TaxRate) + NonCash Expenses - Net Long-Term Investment - Net Working Capital Investment

So, if you want to understand the value of a company, you need to understand the value drivers embedded in free cash flows - sales, expenses, investment, and taxes - and the cost of capital - interest rates and risk premia.

As for Amazon, I'm not sure I agree that its free cash flow was high in the early years. It often had negative earnings and was investing, so negative free cash flow. What it was doing was raising a lot of equity capital to fill the void.

EPS, while informative, can also be misleading, because earnings is sensitive to risk. For example, a share repurchase will, on average, increase EPS because of the decline to the denominator but, because of the increase in leverage, will lead to riskier and therefore less valuable earnings.