Stock-based compensation in EBIT
Stock-based compensation is a real economic cost: it dilutes shareholders. GAAP EBIT includes it as an operating expense. Adjusted EBIT often adds it back because it is non-cash; the SEC permits the add-back but requires equal-prominence GAAP disclosure[CDI][ASC 718].
The debate
- Add-it-back camp: SBC is non-cash, so adjusted EBIT (and adjusted EBITDA) more closely approximates cash-generative capacity.
- Keep-it-in camp: SBC dilutes existing shareholders just as surely as paying cash bonuses. Adjusted EBIT that adds SBC back overstates economic operating profit.
The investor base resolves the debate by adjusting share-count assumptions. Many institutional models use the adjusted EBIT (with SBC added back) for trend comparability and reconcile separately for dilution.
Materiality for large-cap tech
SBC routinely runs 4-7% of revenue for large-cap mature tech (Apple, Microsoft) and 15-25% for high-growth SaaS (Snowflake, Datadog, MongoDB). The choice of treatment materially changes adjusted EBIT for the second cohort.
SEC stance
The SEC permits the SBC add-back in non-GAAP reconciliations provided the GAAP figure has equal prominence and the add-back is described. The SEC has not pushed back on the SBC add-back specifically (unlike, for example, recurring restructuring).
See Snowflake FY25 for the canonical example.