Are Stocks With the Highest Growth Healthy?

  • The chart shows the market cap of firms where stock compensation represents over a third of SALES
  • We have written three pieces about how stock compensation creates the illusion of cost-free cash flow at some firms
  • Specifically we wrote a Quick Take here, a white paper here and the academic on the team published a peer reviewed piece here
  • When companies pay management and employees in stock, they add it back to cash profits
  • While legal, we believe reported “cash profitability” is overstated and shareholders are often unknowingly paying the tab

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History will decide if this ends in steep losses and more regulations as many of the “shiny objects” – stocks investors believe will grow fast – are often entirely dependent on stock compensation to subsidize loss-making sales growth.

We believe executive stock options should be reported as compensation expense in the statement of cash flows.

In our paper The Great Inflation we noted that many high growth stocks for 2021 were “….easily seen devices by which equity and bond holders transfer funds into their coffers to subsidize high rates of sales growth.” We believe the abuse of stock comp expense has merely moved from the income statement to the statement of cash flows. The idea that total compensation – including stock based compensation – can be deemed “non cash” when there is serious dilution underway strikes us as disingenuous.

Below is a list of firms that have stock compensation expense that is equivalent to 33% of revenues. To make the list, a dubious “award”, these firms also could not be in the biotech sector, had to have a market cap greater than $1bn and trade at over 10x price to sales.

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The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.


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