As devoted value investors, can we start a campaign to disallow publicly traded companies from adjusting numbers for stock-based compensation?
I´ve seen cashflow statements where adding back sbc to their operating cashlow suddenly makes the company have zero or sometimes negative cashflow. And I believe the fact that this is allowed within official SEC-filings is absurd.
I know that sbc is in its most literal form, a non-cash expense. That is why, there should be a new term for these sorts of expenses. I would call them cash-equivalent expenses.
As a shareholder of a company (which earnings reports and filings are for) you want to know what´s happening to your piece of the pie or your share of the companies cashflows, so taking sbc out of the operating cashflow is actively deceiving investors on how much cash is actually attributable to their shares.
Now I would call sbc a cash-equivalent expense simply because issuing new shares and giving them to your employees is exactly the same as taking cash, buying shares of the open market and paying your employees with it.
So from a shareholder perspective it´s an expense impacting the future distribution of cashflows.
Scenario 1: Less cash, but same amount of shares
Scenario 2: More cash, but more shares outstanding
So the cash attributable to shareholders is reduced to an equal amount in both equations. I´d take it even further and say that the second scenario is in fact worse for shareholder, since it also reduces the amount of future cashflows attributable to your shares, which is especially bad when it comes to companies with a large chunk of terminal value in relation to present value.
However what we´re seeing today is actually the opposite of what would be optimal for shareholders:
Companies with more present value tend to pay their employees with cash, which in their case is more valuable to shareholders, than future dilution, since the future is uncertain anyway.
And companies with a large chunk of terminal value, such as software firms, where dilution of future cashflows is very impactful for shareholders, tend to have loads of sbc.
But drifting away from the actual point. We need to make excluding sbc from the cashflow statement illegal. Since it´s an inacurate representation of reality.