An adjusted operating margin of 29.5%. A GAAP operating margin of 4%. Same company, same quarter.
The gap is 25.5 percentage points — which means roughly 86% of the profitability the company leads with is added back. Most of it is pay settled in shares.
The argument for excluding it is that no cash leaves the building. That is true, and it is beside the point. Something left the building: a slice of the company, and it came out of yours.
Who actually pays
| Paid in cash | Paid in shares | |
|---|---|---|
| Who funds it | The business | You |
| Where it appears | The cash flow statement | The share count, slowly |
| In adjusted earnings | Included | Removed |
| In most screens | Included | Usually removed |
| Is the employee paid? | Yes | Yes — identically |
That is the whole argument, and it survives every rebuttal. If the company had issued the shares to the market, taken the cash, and used the cash to pay salaries, nobody would call the salaries non-cash. Doing both steps at once does not change what happened.
If paying staff in shares were free, a company could pay everyone that way and run at an infinite margin. The fact that nobody does tells you it is not free.
What dilution does over a holding period
| Share count rising | After 10 years you own | Of the company you bought |
|---|---|---|
| 2% a year | 82.0% | −18.0% |
| 3% a year | 74.4% | −25.6% |
| 5% a year | 61.4% | −38.6% |
Read the last column as what it is: a share of the business, taken from you, each year, for ten years. A business growing earnings 8% a year while diluting 5% is growing your earnings by about 3%.
And note the buyback trap in the footnote, because it is extremely common. A company that issues 4% of itself to staff and repurchases 4% has a flat share count and a line in the press release about returning capital. Nothing was returned. Cash left the business and the staff were paid with it.
One of ours started counting it
In the year to June, more than $200 billion of rides and meals were booked through Uber and the business generated $10.1 billion of free cash flow — and it began counting stock-based pay as a cost in its own headline figure.
That is unusual enough to be worth saying plainly. A company voluntarily making its own headline number worse is telling you something about how it expects to be judged, and it is the single cheapest signal of management quality available in this sector.
Our report went further and also subtracted tax gains, portfolio marks and the insurance-reserve build, which left about 17 times owner earnings for a business compounding bookings at 22% — with the chief executive buying $10 million of stock at $71.
Compare that with how the same adjustment lands elsewhere. At ServiceNow, counting the pay back in takes the shares to 44–60 times owner earnings for a business growing near 20% — a fair price rather than a bargain. At Palantir we count it back into the "Rule of 40" rather than accept the adjusted figure, and the picture changes again.
None of those are accusations. All three companies disclose everything required. The difference is only in which number each one puts in the first paragraph — and in whether you accept it.
Three minutes, on anything you own
On the cover of the annual report, or the top of the income statement. Divide, take the tenth root if you want an annual rate. This single ratio tells you more about how a company treats its owners than any margin.
It is a line in the cash flow statement, added back near the top. Take it out again. That is closer to what the business produced for you, and it is the number to divide the market value by.
Repurchases in the financing section, against the change in share count. If the count is flat while billions were spent, no capital was returned — the cash paid the staff and the press release called it something else.
Not whether the adjusted figure exists — everyone publishes one. Whether the company's own headline includes the cost. The ones that volunteer the harder number are, in our experience, the ones worth reading closely.
A 29.5% margin that is also 4%, a company that started counting the cost, and one where we count it back ourselves.
Each valued on owner earnings, with every adjustment shown.
Frequently asked
Is stock-based compensation a real expense?
Yes. The company hands over a slice of itself instead of cash, so the bill is paid by existing shareholders in ownership rather than by the business in money. The accounts record it; the adjusted figure companies lead with removes it. ServiceNow's adjusted operating margin was 29.5% against a GAAP margin of 4% — most of that 25.5-point gap is pay settled in shares.
Why do companies exclude stock-based pay from adjusted earnings?
The stated reason is that it is non-cash and therefore not part of operating performance. The practical reason is that excluding it makes the margin far better — in this case more than seven times better. Both can be true; only one of them is a reason for an owner to accept the adjusted number.
How much does dilution actually cost a long-term shareholder?
It compounds. A share count rising 3% a year leaves an original holder with about 26% less of the company after ten years; at 5% a year, about 40% less. That is before any buyback — and buybacks that merely offset issuance are not returning capital to you, they are paying the staff with your cash.
What are owner earnings?
What the business actually produces for the people who own it: cash from operations, less the capital spending needed to maintain the position, less every real cost including pay settled in shares. It is the number we value on, and it is usually a good deal smaller than the adjusted figure in the press release.