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Understanding Esop Costs and Why Ebitda for New Age Tech Companies Shouldn’t Include It

By CNBCTV18.COM STI (Update)

As more and more new era technology companies are listed on Dalal Street, Indian retail investors are gradually becoming more familiar with how these companies report their financial results, including profit and loss, operating the EBTIDA and ESOPs (Employee Stock Options).

A major hiccup that has been seen among desi retail investors who have bet on new era tech companies has to do with ESOP costs. However, considering ESOPs when calculating operating EBITDA does not give a fair representation of a company’s financial performance, profitability and growth.

That’s why India’s big new-era tech companies, including Paytm and Zomato, report adjusted EBITDA excluding ESOP, aligned with how big global tech companies like AirBnB, Grab, Uber, Doordash, Affirm and Block share their finances.

Why ESOPs Shouldn’t Be Part of Operating EBITDA

ESOPS are stock-based compensation awarded to employees and are accounted for as non-cash items. It can be noted that ESOPs do not have a direct impact on operational performance because they do not result in an actual cash outflow from the company and the compensation is equivalent to the fair market value of the shares granted to employees.

Simply put, ESOPs are non-monetary measures that major tech companies around the world use to compensate their employees and do not hinder growth or monetization. Although standard accounting standards require ESOPs to be part of operating EBITDA, it is not an accurate measure of business profit or loss as it is a non-cash.

Another important point to note is that ESOP costs decrease over time as the acquisition ages. Therefore, the operating metrics investors need to track is Adjusted EBITDA, which allows them to accurately describe the amount of growth a company is achieving each quarter.

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