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Adjusting earnings for Stock Option expenses

Currently, corporations are able to keep a major expense off of their income statement -- stock options. But companies are required, in their 10-K reports, to estimate the cost of these options. Let's use Krispy Kreme Dougnuts as an example. Krispy Kreme reported, in 2004, that its annual earnings per share was $0.92. Let's see how much they earned after adjusting for stock option expense.

You'll see that, after adjusting for the cost of stock options, Krispy Kreme only earned $0.73 per share. That's a lot less than $0.92. It should be noted that Krispy Kreme Dougnuts is using one particular method for valuing options. And there are other ideas regarding the best way account for options expenses. But it's better to use this method than to ignore option expenses completely.