Owner Earnings
Owner Earnings
Warren Buffett's measure of the cash a business truly produces for its owners: reported net income plus depreciation and amortization, minus the capital spending needed just to maintain its competitive position.
When to use: Use to value a business the way a long-term owner would, when reported earnings are distorted by non-cash charges and when growth capex should be judged separately from maintenance.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| OwnerEarnings | Owner Earnings | Cash earnings after maintenance capital spending | $ |
| NetIncome | Net Income | Net income for the period | $ |
| DandA | Depreciation & Amortization | Non-cash charges added back | $ |
| MaintCapEx | Maintenance CapEx | Capital spending required to sustain current volume and position | $ |
Real-Life Examples
Example 1: Asset-Light Franchise
Net income $300M, D&A $120M, maintenance capex $90M.
Given
Step-by-Step
Owner earnings exceed net income because depreciation overstates what it costs to keep the business running. That is the signature of a business with durable assets.
Example 2: Capital-Hungry Business
Net income $45M, D&A $60M, maintenance capex $70M.
Given
Step-by-Step
Owner earnings fall below net income: keeping the assets current costs more than the depreciation charge admits. Reported earnings overstate what the owner can take out.
Frequently Asked Questions
It is not reported. Common proxies are depreciation itself, a multi-year average of capex in years without expansion, or management disclosure. The judgment involved is the point: Buffett called the figure necessarily approximate.
Free cash flow subtracts all capex, including spending on growth. Owner earnings subtract only what maintains the business, so growth investment is judged on its own merits rather than penalizing current earnings.