The capex question
FCF subtracts all capex; owner earnings subtracts only maintenance capex - what's needed just to stand still.
Comparison
Owner earnings vs free cash flow
Owner earnings and free cash flow both try to capture the real cash a business generates, but owner earnings - Buffett's measure - subtracts only maintenance capex, while standard free cash flow subtracts total capex. The difference is growth capex: free cash flow penalizes a company for investing to grow, whereas owner earnings tries to isolate just the spending needed to maintain the current business.
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Short answer
FCF = operating cash flow - total capex. Owner earnings ≈ net income + D&A - maintenance capex. For a company spending heavily to grow, FCF understates the true earning power; owner earnings corrects for it - but estimating maintenance capex is judgment, not a line item.
The key differences
Who it favors
Owner earnings flatters growth investments (it adds growth capex back); FCF is the conservative, fully-auditable number.
Precision vs honesty
FCF is a clean formula off the cash flow statement. Owner earnings needs an estimate of maintenance capex - more insight, less objectivity.
Buffett's reasoning
He preferred owner earnings because GAAP earnings and even FCF can misstate the cash a long-term owner actually gets to keep.
Why the gap matters for growth companies
A company generates $500M of operating cash flow and spends $300M on capex - but $200M of that is building new capacity (growth), and only $100M is maintaining existing assets. Standard FCF is $500M - $300M = $200M. Owner earnings, subtracting only the $100M maintenance capex, is roughly $400M.
FCF makes the business look half as cash-generative as it really is, because it penalizes the company for investing to grow. Owner earnings tries to show the underlying machine. The catch: splitting capex into maintenance vs growth is an estimate, so owner earnings trades some objectivity for a truer picture.
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Related
- What is owner earnings? - Buffett's preferred earnings measure, defined.
- What is free cash flow? - operating cash flow minus total capex.
- What is FCF yield? - the valuation ratio FCF feeds.
- What is the Buffett-Fit Score? - how invest-like uses owner-earnings-style logic in scoring.
See cash-generation the Buffett way
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