Owner Earnings

What it is\nIntroduced in Buffett's 1986 letter: "(a) reported earnings + (b) depreciation + (c) other non-cash charges − (c) the average annual amount of capitalized expenditures for plant and equipment that the business requires to fully maintain its long-term competitive position."\n\nIn plain English: net income, plus the non-cash stuff (depreciation), minus the cash you actually need to spend each year to keep the business running.\n\n## Why it matters\nReported earnings can be massaged. Free cash flow can be flattered by under-investing. Owner earnings asks the honest question: if I owned this whole business outright and only took out the surplus, how much would I get every year?\n\nBuffett: "If we calculated [owner earnings] for all American business in aggregate, we would arrive at a number considerably below the reported earnings figure."\n\n## How to use it\n- Compute owner earnings yield = Owner Earnings / Market Cap\n- Compare against a 10-year Treasury yield. If owner earnings yield ≫ Treasury, the business is pricing as a bargain.\n- Track it over 5–10 years. Volatile owner earnings = unpredictable business = lower confidence.