When Bart got a job in a classic episode of The Simpsons, his new dot-com employer paid him in stocks … that Bart unspooled like toilet paper.
Funny, yes. But while stock-based compensation can be good for employees, it can be problematic for shareholders. Many companies exclude it from their “adjusted” earnings, so it can be an unexpected and significant weight on the bottom line.
So, how do you find a company’s stock-based compensation to factor into your analysis of an investment?
Motley Fool Analyst Jim Mueller walked a member through it as follows:
Stock-based compensation would show up on the cash flow statement in the Cash Flow From Operations section. It would show up as a positive number (a cash flow in, adding to net income) because it’s actually not a cash expense when it’s taken out on the income statement (where it’s usually buried inside things like SG&A or cost of goods sold or stuff like that).
However, Yahoo Finance doesn’t break the cash flow statement down to very much detail at all (and doesn’t show it). The Fool’s display of the cash flow statement is better, but still not detailed enough. You’re going to have to go the actual source document, rather than relying upon collection and summary sites.
- Go here, to the SEC: http://www.sec.gov/edgar/searchedgar/companysearch.html
- Type in a ticker in the right-hand search box. Let’s use ILMN.
- Scroll down the list of filings. You’re looking either for the latest 10-Q or the latest 10-K. The Q’s cash flow statement will show year-to-date numbers, while the K’s shows the last full fiscal year.
- Click the blue button labeled Interactive Data. This will display all the tables pulled from the Q or K.
- In the table of contents box on the left (yellow), choose Financial Statements.
- Then choose Consolidated Statements of Cash Flows.
In the operations section (the first section), there’s the line “Share-based compensation expense.” For ILMN in 2014, that was $152.551 million (the number listed is in thousands of dollars, according to the top of the statement).
If you’re part way through the year and want TTM (trailing 12 months, i.e. last 4 quarters), you’ll need both the Q and the K. To find the TTM number, take the number from the K, add this year’s YTD number, and subtract last year’s YTD number.
Note that not all companies use that type of compensation and/or don’t list it in the cash flow statements as a separate line item (especially if it’s very tiny, where it would be bundled in with “other”).
More to consider with stock-based compensation
Motley Fool member Mike Sandrik adds the following take regarding his analysis of companies and their use of stock-based compensation.
“When it comes to share-based compensation expense, I like to compare diluted share count to basic share count, which you can find near the bottom of the earnings statement,” he wrote on the Fool’s discussion boards. “The diluted share count number assumes that all the in-the-money options are exercised and any money raised from the exercise is plowed back into share repurchases. Always accurate with respect to what companies do in real life? No, but that’s the GAAP method of figuring diluted share count.
“In my valuations I’ll use diluted share count to take into account share-based compensation expense. I find that gives me the basic discount I’m looking for without going through the complexity of calculating the present value of the options myself,” he continues. “While SBC is a non-cash expense during the period it’s incurred (which is why it’s added back in the cash flow statement), it’s certainly an expense long term, so it should be deducted from the value of the company.
“That said, I don’t like subtracting out the value I see in the cash flow statement since that can be pretty lumpy quarter to quarter,” Sandrik concludes. “Most companies incur more stock-based compensation expense in one quarter than in another, which is another reason I just like using diluted share count in my valuations: it’s simple and gives you the basic gist of the expense incurred.”