What is dilution-aware valuation?

Dilution-aware valuation accounts for the impact of stock-based compensation (SBC) on shareholder value. Traditional models ignore SBC dilution, but Michael Burry's approach adjusts the valuation formula to reflect the true cost of equity dilution from stock grants and options.

What is Owner's Earnings?

Owner's Earnings is a cash flow metric that represents the true earnings available to shareholders. It's calculated as: Net Income + GAAP SBC (add back non-cash) - Actual Stock Buybacks - RSU Tax Withholding Payments. This shows the real cash cost of stock-based compensation.

How is this different from a regular DCF calculator?

Unlike traditional DCF calculators that use GAAP earnings or free cash flow, BurryDCF uses Owner's Earnings which properly accounts for stock-based compensation costs. It also applies a dilution adjustment to the Gordon Growth Model formula to reflect ongoing shareholder dilution.

Where does the data come from?

BurryDCF pulls data directly from SEC EDGAR XBRL filings (10-K and 10-Q reports) for Owner's Earnings components, and uses Polygon.io for real-time stock prices, dividends, and company information. All data sources are transparent and verifiable.

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Cash Flow

Owner's Earnings: The True Cash Flow

Michael Burry's methodology for calculating what shareholders actually earn — not what Wall Street tells you

10 min read

Contents

1. The Problem with Wall Street Earnings

Wall Street has a dirty secret: they systematically overstate company earnings by treating stock-based compensation (SBC) as a "non-cash" expense that should be added back to earnings.

What Wall Street Does

• Takes GAAP Net Income
• Adds back SBC expense as "non-cash"
• Reports inflated "Adjusted Earnings"
• Ignores the real cost of dilution

The Reality

• SBC creates real dilution
• Companies spend real cash on buybacks
• RSU tax withholdings are real cash outflows
• True cost is often 5-10x the GAAP expense

The Hidden Truth

The GAAP SBC expense is essentially meaningless. The TRUE cost of stock-based compensation is the actual cash companies spend to offset dilution — through buybacks and RSU tax withholdings.

2. What Are Owner's Earnings?

Based on Michael Burry's "Cassandra Unchained" Substack

Owner's Earnings is a concept developed by Michael Burry (of "The Big Short" fame) to calculate the true cash flow available to shareholders after accounting for the real cost of stock-based compensation.

"The TRUE cost of SBC is not the GAAP expense — it's the actual cash spent to offset dilution through buybacks and RSU tax withholdings."
— Michael Burry

The Key Insight

When a company grants stock options or RSUs to employees, it creates dilution. To prevent shareholders from being diluted, companies must buy back shares. The cash spent on these buybacks (plus RSU tax withholdings) is the TRUE cost of SBC — not the accounting expense.

3. The Formula

Owner's Earnings Formula

OE = NI + SBC − Buybacks − RSU Tax

Add Back (+)

NI = Net Income (GAAP)
The starting point — reported earnings
SBC = Stock-Based Compensation expense
Non-cash accounting expense (add it back)

Subtract (−)

Buybacks = Cash spent repurchasing shares
Real cash outflow to offset dilution
RSU Tax = RSU tax withholding payments
Hidden cash outflow in Financing Activities

Why Add Back SBC?

We add back the GAAP SBC expense because it's a non-cash accounting entry. Then we subtract the REAL cash costs (buybacks + RSU taxes). This gives us the true cash flow to shareholders.

Calculating True Owner's Earnings: Start with Net Income, add back SBC expense, then subtract actual Buybacks and RSU Tax withholdings — **The Owner's Earnings Method:** Start with GAAP Net Income, add back the non-cash SBC expense, then subtract the REAL cash costs (buybacks + RSU taxes).

4. Real Example: NVIDIA (2018-2025)

From Michael Burry's analysis

Let's look at NVIDIA — one of the most valuable companies in the world — and see how Wall Street's earnings compare to TRUE Owner's Earnings.

Metric	Amount
GAAP Net Income	$205B
+ GAAP SBC (add-back)	+$20.6B
Wall Street "Adjusted" Earnings	$226B
− Actual Buybacks	−$91B
− RSU Tax Withholdings	−$21.5B
TRUE Owner's Earnings	$114B

Earnings Quality

50%

OE / Wall Street

GAAP SBC Expense

$20.6B

Accounting entry

TRUE SBC Cost

$112.5B

5.5x higher!

The Shocking Truth

NVIDIA's TRUE earnings are only 50% of what Wall Street reports! The GAAP SBC expense ($20.6B) is essentially meaningless — the TRUE cost of SBC was $112.5B (buybacks + RSU taxes), which is 5.5x higher.

NVIDIA Earnings Reality: Waterfall chart showing Net Income ($205B), misleading SBC add-back (+$20.6B), then massive deductions for Buybacks (-$91B) and RSU Tax (-$21.5B) to arrive at True Owner's Earnings ($114B) — **NVIDIA's Earnings Reality:** True Owner's Earnings are only ~50% of what Wall Street reports due to the hidden costs of dilution offset.

5. Earnings Quality Metric

A simple ratio to detect inflated earnings

The Earnings Quality metric is a simple ratio that tells you how much of Wall Street's reported earnings are actually real:

Earnings Quality Formula

Earnings Quality = Owner's Earnings / Wall Street Earnings

>80%

Good

SBC cost is reasonable relative to earnings

60-80%

Caution

Significant SBC dilution — investigate further

<60%

Red Flag

Wall Street earnings are significantly inflated

Companies with Low Earnings Quality

Many high-growth tech companies have earnings quality below 60%:

• NVIDIA: ~50% (as shown above)
• Tesla: Dilutes shareholders at ~3.6% annually
• Palantir: Often has NO earnings after TRUE SBC cost
• Amazon: Gave employees $233B in stock (more than $220B GAAP earnings since 2018)

6. Finding the Data in SEC Filings

The exact XBRL fields BurryDCF uses

BurryDCF pulls data directly from SEC EDGAR XBRL filings (10-K and 10-Q reports). Here are the exact fields used:

Component	SEC XBRL Field
Net Income	us-gaap:NetIncomeLoss
SBC Expense	us-gaap:ShareBasedCompensation
Buybacks	us-gaap:PaymentsForRepurchaseOfCommonStock
RSU Tax	us-gaap:PaymentsRelatedToTaxWithholdingForShareBasedCompensation

Full Transparency

BurryDCF shows you exactly which SEC fields were used for each calculation. Click the info icon next to Growth Rate to see the full data provenance, including filing dates and fallback sources.

The Hidden RSU Tax

RSU tax withholdings are often buried in the "Financing Activities" section of the cash flow statement. This is a real cash outflow that most analysts miss. When employees vest RSUs, companies withhold shares and pay cash to the IRS on their behalf — this is a real cost of SBC.

7. Why This Matters for Valuation

Owner's Earnings is the CF₁ (cash flow) input in both the Gordon Growth Model and Burry's dilution-aware formula. Using the wrong cash flow leads to dramatically wrong valuations.

Using Wall Street Earnings

If you use Wall Street's inflated "Adjusted Earnings" as CF₁, you'll calculate a fair value that's 50-100% too high for companies with significant SBC programs.

Using Owner's Earnings

Using TRUE Owner's Earnings gives you a realistic fair value that accounts for the real cost of SBC. This is what shareholders actually receive.

Connection to Discount Rate

Remember from our CAPM article: the discount rate (d) determines how much future cash flows are worth today. But if your cash flow (CF₁) is wrong, even a perfect discount rate won't save you.

The Complete Picture

To value a stock properly, you need both:

• Correct CF₁: Owner's Earnings (this article)
• Correct d: CAPM discount rate (previous article)
• Dilution adjustment: Burry's formula (next article)

Continue Learning

Now put it all together with the complete valuation methodology

Discount Rate

CAPM Explained

Understand how to calculate the discount rate using the Capital Asset Pricing Model.

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Valuation

Burry's Dilution-Aware DCF Guide

Put it all together: learn how to adjust the Gordon Growth Model for stock dilution.

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