1.Start with reported earnings
GAAP net income for the trailing twelve months, before any owner-friendly adjustments. The starting line is intentionally conservative.
Definition
What is owner earnings?
Owner earnings is Warren Buffett's preferred profitability metric, introduced in the 1986 Berkshire shareholder letter: reported earnings plus depreciation and amortisation, minus the maintenance capital expenditure required to keep the business at its current competitive position.
Last reviewed:
Short answer
Buffett described owner earnings as the cash a long-term owner could withdraw from the business each year without harming the company's competitive position. The formula is reported earnings plus depreciation and amortisation, minus maintenance capex, plus or minus normalised working-capital changes. It is deliberately different from both reported earnings (overstated by non-cash charges) and free cash flow (understated when growth capex is high).
How to calculate owner earnings
Buffett laid out the formula in the 1986 letter and acknowledged the hardest part is estimating maintenance capex, which is not a reported line item. invest-like uses a multi-year capex-to-depreciation ratio plus management commentary to approximate it.
2.Add depreciation and amortisation
Non-cash charges that reduced reported earnings but did not actually leave the business. The reverse of the operating cash flow walk.
3.Subtract maintenance capex
The capital spending required to keep the business at its current competitive position. Not total capex, which also funds growth: only the maintenance share.
4.Adjust working capital
Add or subtract the normalised change in working capital required to sustain current operations. Smooths out one-off swings in receivables and inventory.
Why owner earnings matters
Reported earnings overstate true profitability for any business with non-cash depreciation that does not match real wear and tear. Free cash flow understates profitability when the company is funding growth, by treating growth capex as a current cost. Owner earnings splits the difference and produces a number a private owner would actually care about.
invest-like uses owner earnings inside the valuation pillar of the Buffett-Fit Score. The owner-earnings yield (owner earnings divided by enterprise value) is compared to the 10-year Treasury yield plus an equity risk premium. See /learn/what-is-buffett-fit-score/ for the full rubric.
The Consensus - free weekly screen
Every Monday: the stocks that newly pass 5 or more of the 7 legendary-investor frameworks (Buffett, Graham, Lynch, Greenblatt, Munger, Fisher, Smith), plus every grade change that matters. The 5-year track record of this screen is published openly. One email a week, unsubscribe anytime.
Related
- Buffett-Fit methodology - owner earnings is the cash-flow input behind the Buffett-Fit valuation pillar; this is the full rubric.
- Top Buffett-fit stocks today - the live ranking of 21,000+ stocks across 68 countries (roughly half listed outside the US) scoring highest on owner-earnings-led Buffett criteria.
See owner-earnings analysis on a real verdict
Every Buffett-Fit verdict on invest-like surfaces owner earnings and the owner-earnings yield inside the valuation pillar reasoning.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.