In a model class sample, I saw that EBIT = operating income + stock based compensation expenses. In this case, What's the logic behind that(if not certain, might venture a guess )? Is the model wrong? I think the figure of EBIT and operating income should be reversed.
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It depends a) what you are using the EBIT for (i.e. valuation, cash flow modelling), b) how you are treating the number of outstanding shares vs. the implied stock number after SBC.
Generally, SBC is not a cash item so you add it back when you calculate a cash flow. However, it is a cost that you would still have if you buy the company / take it private as an higher cost of labor (i.e. you are not giving stocks but you would need to pay higher salaries to provide the same incentive to your employees). With regards to the number of shares, if you keep in your model the SBC as it is, you would need to adjust (increase) the number of shares going forward, to reflect the dilution for the current shareholders. Generally, I have not seen this adjustment as you would simply assume a cash cost which replaces SBC going forward and no dilution.
The model is therefore not wrong / right per se but depends on what assumption they are making and on consistency throughout.
Thanks for your explanations but I did not get the linkage between dilution and EBIT/operating income. If there is dilution, I guess it affects both EBIT and operating income? In this case the EBIT and operating income are just items listed in income statement. The literal meaning of EBIT is earnings before interests and taxes so it should be no more than operating income(suppose SBC might be the only one non-operating item and is negative in this case) no matter operating income is counted as cash item or not. Yet clearly after adding back SBC, EBIT becomes more than operating income.
The only reason here why ebit > operating income is because SBC is treated as non-recurring. My previous message was more general and not specifically linked to this situation. The only difference between ebit and operating income should be non recurring items (although sometimes you may have people calling EBIT as Adj. EBIT to make it clearer).
Thanks for your explanations!
If I am not wrong, stock-based comp is typically included in the operating expenses (independently from being either cash or non-cash expense) so the IS structure you shows seems unusual.
So that expense should be taken into account to find the operating income but it seems wrong adding it back to calculate EBIT, unless it has a sort of specific-model sense, for example in order to be able to compare EBIT with other peers' EBIT without stock-based comp.
SBC is non recurring hence is adjusted and also is a noncash expense?
This is not always true. SBC May be a recurring component of employee cost for listed company.
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