Stock-based Employee Compensation: Value and Pricing Effects by Aswath Damodaran
From GAAP Earnings to Adjusted Earnings: The Twitter Adjustments
To get from their reported losses to profits and from reported EBITDA to Adjusted EBITDA, Twitter made the following adjustments:
Twitter’s adjustments shifted a fairly substantial loss exceeding half a billion into both net profits ($9.774 million) and positive EBITDA ($44,745) in the fourth quarter.
Stock-based Employee Compensation: A long & tortured road
Stock-Based Compensation: Expense or not? Operating or Capital? Cash or non-cash?
1. Is it an expense?
2. Is it a capital or operating expense?
This is trickier, since it really depends upon who gets the options and what function they play at the company in question. In the case of Twitter, for instance, the bulk of the options were granted to employees in the R&D department:
3. Is it a non-cash expense?
Stock-based Compensation and Value
Stock-based Compensation & Pricing
If you are a fan of using multiples and comparables, you are probably congratulating yourself at this point for having avoided the complications that ensue from stock-based compensation in intrinsic valuation. However, you would be celebrating too early. All multiples are affected by stock-based compensation, in small and big ways. Assume, for instance, that you are comparing PE ratios across technology firms that are big users of stock-based compensation. At the risk of stating the obvious, the PE is the market price divided by the earnings per share, but the per-share values can be impacted by how they are computed. Assume, for instance, that analysts are computing earnings per share by adding the stock-based compensation to the stated earnings and then dividing by the fully diluted number of shares and that you are comparing three companies. All three companies have 10 million shares outstanding, trading at $10/share currently and their GAAP net income is $10 million. The first pays $ 5 million in cash compensation and uses no stock-based compensation, the second grants 2 million at-the money options with a value of $5 million to compensate employees and the third has set aside 0.5 million restricted shares with a value of $5 million to compensate employees. The table below computes and compares their PE ratios, using the standard (dilution-based approaches):