Lesson 4 of 7
Counting stock pay once
Cisco's share-based compensation rose from 1,526 to 3,830 million dollars over ten filed years. It is already an expense, and adding it back counts it twice.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Under ASC 718 share-based compensation is already an expense in the income statement, so a normalised earnings figure that adds it back has removed a real cost.
- It is a non-cash charge, so it is added back in the cash flow statement and never reduces operating cash flow.
- Cisco's charge grew from 1,526 million dollars in fiscal 2017 to 3,830 million in fiscal 2026, from 3.18 percent of revenue to 6.05 percent.
Share-based compensation is where normalising most often goes wrong, and the error is not subtle. It is already counted once, in the income statement, and the adjustment people make removes it.
Cisco share-based compensation as a share of revenue
- Share-based compensation over revenue
Show the numbers
| Share-based compensation over revenue | |
|---|---|
| FY17 | 3.18% |
| FY18 | 3.19% |
| FY19 | 3.03% |
| FY20 | 3.18% |
| FY21 | 3.54% |
| FY22 | 3.66% |
| FY23 | 4.13% |
| FY24 | 5.71% |
| FY25 | 6.43% |
| FY26 | 6.05% |
Where it sits, on each statement
In the income statement it is an operating expense, spread through cost of sales, research and development, sales and marketing, and general and administrative. You will not find a line called share-based compensation there, which is part of why people forget it is present.
In the cash flow statement it appears explicitly, as a non-cash add-back in the reconciliation from net income to operating cash flow. That is where the figures above come from, and it is the only place in the primary statements where the total is stated on one line.
The double count, stated plainly
A normalised figure that starts from operating income and adds share-based compensation back has claimed the company pays its people less than it does. A free cash flow figure computed as operating cash flow less capital expenditure never subtracted it in the first place, because it was added back two lines above.
Use both figures in the same analysis and the benefit of not paying that cost has been counted twice: once in the earnings figure you inflated, and once in the cash figure that never carried it.
The correct treatment is the dull one. Leave the expense where the standard puts it. If you want a cash measure, subtract the charge from operating cash flow yourself and say that you did.
Why the trend matters more than the level
The level tells you what the business costs to run. The trend tells you whether the answer is changing. Cisco's charge rose from 3.18 percent of revenue in fiscal 2017 to 6.05 percent in fiscal 2026, and the sharp part of that move is between fiscal 2023 and fiscal 2025, which is the period spanning a large acquisition and the retention arrangements that usually accompany one.
A normalised figure built on the early years of that decade would carry a compensation cost the business has not had for three years.
Check yourself
Where does share-based compensation appear on each primary statement?
- As its own line in the income statement and nowhere else
- Spread through the operating expense lines of the income statement, and stated on one line as a non-cash add-back in the cash flow statement
- Only in the notes
Show the answer
Answer: B.
Under ASC 718 it is an expense allocated across the functional expense lines, and it reappears explicitly in the reconciliation to operating cash flow because it uses no cash.Why does adding the charge back to earnings and also using unadjusted operating cash flow count it twice?
- Because the charge is recognised in two periods
- Because the cash figure never carried the cost, so inflating the earnings figure removes the same cost a second time
- Because the tax effect is counted separately
Show the answer
Answer: B.
Operating cash flow already excludes the charge through the add-back. Removing it from earnings as well credits the company twice for a cost it did incur.Cisco's share-based compensation went from 3.18 percent of revenue in fiscal 2017 to what in fiscal 2026?
- 2.4 percent
- 6.05 percent, having peaked at 6.43 percent in fiscal 2025
- 11.2 percent
Show the answer
Answer: B.
The charge grew from 1,526 million dollars to 3,830 million while revenue grew more slowly, so the share of revenue roughly doubled over the decade.Sources
- Cisco Systems, Inc., annual reports on Form 10-K for fiscal years 2017 through 2026: share-based compensation from the consolidated statements of cash flows, revenue and operating income from the statements of operations.
- ASC 718, Compensation, Stock Compensation: share-based compensation is an expense in the income statement and a non-cash add-back in the cash flow statement, so it reduces earnings and does not reduce operating cash flow.
What this leaves out
- The percentages are this course's arithmetic on two reported lines, rounded to two decimals.
- The association between the rise after fiscal 2023 and a large acquisition is an observation about timing. The filings do not attribute the increase to any single cause, and this lesson does not either.
- Cisco appears here as a source of filed figures. Nothing in this lesson says or implies anything about its reporting or its pay practices.
- Nothing here is advice about any security.