What makes you think CSCO is purchasing capital equipment with stock options?
You seem to have completely missed the point of the discussion, Ron, and that is that in my opinion free cash flow already includes non cash items in instances where companies purchase capex with shares. Purchasing businesses with shares was quite common during the bubble and all this capex was given a value at time of purchase in the investment section of the cash flow statement. No one then tried to argue that it was a phoney expense and that the capex was really free because the company did not expend cash to purchase it. And companies included the non cash expense for capex in their reported free cash flow numbers. But the argument is still made in the case of stock options---that it is a phony expense and that items or services purchased with stock options should not be expensed on the income statements or in the free cash flow calculation. The fact that purchase of capex with shares, however, is included as a deduction in reported free cash flow numbers flies in the face of the argument that we cannot include stock option expense in the free cash flow calculation because it is a non cash item.
I then went on to state my belief, and I asked for confirmation from our resident CPA, that accounting rules would also require companies to expense capex purchased with stock options. If this can be confirmed, then it throws an even bigger ringer (above and beyond the argument above) into the stock option apologists’ argument that we should not include employee stock option expense in the free cash flow calculation. Rather than me spending time looking for a case where a company has purchased capex with stock options as you suggest, it would be far more useful for those familiar with accounting rules, to verify the treatment of capex purchased with stock options on the cash flow statement according to GAAP accounting standards. Regardless of the treatment of the current treatment of capex purchased by stock options, however, the fact remains that non cash share based payments are already accepted as a deductible item in the free cash flow calculation in the case of share based payments.
The bottom line to all this however is that free cash flow taken alone, that does not include stock option expense, is a very poor indicator of wealth accumulating ability of companies who heavily use stock options, and I am really tired of seeing folks mistakenly portraying it as such.
Regards, Huey |
