- Share-based compensation (SBC) is an important instrument for aligning the interests of a company's executives and employees with those of common shareholders.
- Younger companies in particular benefit from such compensation structures, but the magnitude of stock-based compensation should always be critically scrutinized.
- Excessive equity compensation is best identified by relating expenses to normalized operating cashflow and performing peer group analyses.
- In the sample, free cashflow was generally reduced by 2%-10% due to SBCs, impairment charges and other "one-offs". Outliers with required adjustments ranging from 20% to >100% were also identified.
- Investors should carefully consider seemingly "non-cash" costs when evaluating a company's true cash generating ability.
For further details see:
Stock-Based Compensations: Is Your Company's Cash All But Trash?