I’m often reminded of the saying “sales are vanity, profit is sanity and cash is reality” when reading reports on retailers’ financial performance.

I’m often reminded of the saying “sales are vanity, profit is sanity and cash is reality” when reading reports on retailers’ financial performance.

A reminder came this week when reading stories about Amazon not actually making a profit, which to me is proof that profits alone do not show us the whole picture.

Yes, it’s true that Amazon made a net loss of $7 million in the second quarter of 2013 - but looking at profits alone doesn’t always tell the whole story of how a company is performing.

It can often be a lot more insightful to look at earnings before interest, taxes, depreciation and amortisation (EBITDA) which is a metric more widely used in the City to measure performance.

For investors, this metric is often a lot more revealing than net profit alone, as it focuses on the cash that the business is actually generating. So, if people were to judge Amazon on its EBITDA - which was $2.92 billion in the trailing 12 months to 30th June 2013 - far fewer people would probably be concerned about its profits.

It’s important to realise that Amazon is making some pretty large investments at the moment and that requires cash.

In 2012 alone, the company spent $3.8 billion on capital projects to enhance its offering to customers and to invest in new and growing categories. By continuing to invest in this way, Amazon will be able to innovate much more effectively, and build the infrastructure that it needs to expand its offering and establish an even more solid platform for growth.

The expense (and associated benefits) of investments like these is yet another reason to look past net profits. This high-level commitment to improvement, growth and future stability should actually be a given for any major retailer of this size, and indeed for any other retailers who aspire to be key influencers in today’s global market.

In actual fact, Amazon barely makes any profit because it doesn’t try to. It would rather focus on satisfying its customers, keeping hold of them, and selling more to them as it continues to expand.

And its shareholders seem pretty happy with that approach. Even though the company reported a second-quarter net loss and weaker international growth, its stock recently hit an all time high.

Amazon understands that this is a sector where resting on your laurels is punished first and foremost by the consumer. So, we should actually be praising Amazon for continuing to evolve its offering in order to react to the ever-changing demands of today’s consumers.

Could Amazon double its profit margins in the next quarter if it wanted to? Probably. But only if it were to stop investing in lots of interesting areas - and who on earth wants that?

  • Dan Coen, director, Zolfo Cooper