Stock-based compensation

Companies pay people partly in shares. The income statement treats that as an expense, correctly, because it is compensation. The cash flow statement then adds it back, also correctly, because no cash left the building.

The result is a genuine cost that disappears from free cash flow. Existing shareholders paid it, in ownership rather than dollars, and the only place it shows up is a rising share count.

Operating cash flow of $250m including $40m of stock-based compensation added back, and capital expenditure of $80m.

1. 1Free cash flow as normally calculated is 250 - 80 = $170m.
2. 2Of that, $40m was paid to employees in shares rather than cash.
3. 340 / 1,000 of revenue = 4%.

Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.

• Compare it to revenue and to free cash flow. Above roughly 10% of revenue it materially changes what the cash flow figure means.
• The honest cross-check is the diluted share count. If it is rising steadily, dilution is the bill.
• Buybacks at companies with heavy stock compensation frequently just offset issuance, leaving ownership flat.

• There is no single agreed adjustment. Subtracting it in full and ignoring it entirely are both defensible, and they produce very different valuations.
• The expense is measured at grant date, so it reflects an old share price rather than what the shares are worth now.

Not adjusted for anywhere. It flows through as filed, which means free cash flow here is flattered at companies that pay a lot of it, and the intrinsic value model built on that free cash flow inherits the same flattery. This is a deliberate choice rather than an oversight, and it is one of four disclosed on the methodology page. The diluted share count is the place to see what it actually cost.

The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.