As an investor, the two words that you should dread the most in a financial statement are “adjusted earnings”, as companies take accounting earnings and tweak them for sundry items.
In the process, they almost always turn big losses into smaller ones, and losses into profits. One adjustment that is consistently made to get to adjusted earnings, or ebitda, is the adding back of stock-based employee compensation, with the rationale that it is either a non-recurring operating expense or, more frequently, that it is a non-cash expense. The adjustment has its biggest impact at young, high-growth companies, which are among the most prolific users of equity compensation.
Uber, for instance, reported $172m in stock-based compensation expenses in 2018, but the usage of employee options and restricted stock is widespread, with the cost tallying to $1.1bn at Amazon and $1.7bn at Apple in the most recent year. Lest you think that this is a phenomenon unique to technology companies, Wells Fargo and JPMorgan Chase had $2.4bn and $1.9bn in equity-based compensation respectively, during the most recent 12 months. In short, as an investor, you can run but you cannot hide from this phenomenon.