Red flag: shareholder dilution

Interpretation

Triggered when the diluted share count has grown by more than 2% per year over roughly five years.

Formula

Trigger: 5-year share count CAGR > +2% per year

Why it matters

Dilution is a silent, compounding tax on ownership. At 2% annual issuance, an investor's proportional claim shrinks by about 10% over five years — the business must grow that much before the shareholder gains anything per share. Unlike most costs, dilution never appears on the income statement as such; the only place to see it is the share count itself, which is why we flag its trajectory directly.

What good looks like

When triggered, identify the source: routine stock compensation issuance (a recurring cost — read with SBC/FCF), acquisition currency (judge the deals — issuing cheap stock for expensive targets destroys value, the reverse can create it), or capital raises (for a cash-burning company, expect the dilution to continue). The best pattern after a triggered flag is a management that acknowledges it and commits to net share reduction.

Caveats

Historical counts are split-adjusted, so the figure reflects genuine issuance. A single large equity raise or stock-funded acquisition can push the 5-year rate over 2% without an ongoing practice — check whether the count is still rising year by year. Young companies dilute more as a matter of course; the question is whether the rate is declining as they scale.