It's always important for investors to look at companies' earnings using both GAAP (generally accepted accounting principles) and non-GAAP -- especially when assessing rapidly growing social-media stocks like Facebook (FB), whose reports utilize non-GAAP standards.

Facebook delivered better-than-expected non-GAAP results after the bell Wednesday, in line with similar upside surprises during the last few quarters. The business media widely heralded FB's earnings and the stock has rallied to a new all-time high today.

But a close look at Facebook's balance sheet shows some critical issues of earnings adjustments -- and the non-recording of compensation -- within the company's quarterly income statement:

Source: Facebook; Seabreeze Partners Management

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To summarize my more-critical assessment of Facebook's latest report:

  • Revenue rose 41%
  • But total costs and expenses rose 68%
  • Income from operations (including all costs/expenses) increased 4%
  • But total share-based compensation expenses climbed 114%

Next, let's look at a chart that shows the wide gap in the 2011-to-present period between Facebook's reported EBITDA margins (in blue) and its "adjusted EBITDA margins (in red):

Source: Seabreeze Partners Management

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Now, Facebook isn't alone in its liberal use of accounting; that's de rigueur for many social media companies.

For example, here's a similar chart for LinkedIn (LNKD) :

Source: Seabreeze Partners Management

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And here's the combined trend of EBITDA margins (adjusted and unadjusted) for Zillow  (Z) - Get Report and Trulia  (TRLA) :

Source: Seabreeze Partners Management

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Even Twitter (TWTR) - Get Report -- one of my favorite stocks -- is aggressive in its adjustments:

Source: Seabreeze Partners Management

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What This All Means

"Price is what you pay, value is what you get."

-- Warren Buffett

As Jim "El Capitan" Cramer expressed Thursday morning, Facebook is a remarkable company and has been an amazing growth engine -- and FB investors have profited mightily as a result.

The stock is certainly this market cycle's darling, but investors should always ask: "What price growth and what metrics are we using to determine value?"

Facebook currently has more than a $300 billion market capitalization, which means its share trade and at more than 50x reported estimated 2015 earnings (i.e. before compensation "adjustments") and at nearly 18x this year's projected revenues.

But the shares look even more overpriced if you use GAAP earnings and include compensation-based costs, rather than just relying on the non-GAAP reporting that many technology and social-media companies seem to have adopted.

Editor's Note: This article was originally published at 8:59 a.m. EST on Real Money Pro on Nov. 5.

At the time of publication, Kass and/or his funds were long/short XXX, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.