What it is
Introduced 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."In 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.
Why it matters
Reported 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?Buffett: "If we calculated [owner earnings] for all American business in aggregate, we would arrive at a number considerably below the reported earnings figure."
How to use it
- Compute owner earnings yield = Owner Earnings / Market Cap
- Compare against a 10-year Treasury yield. If owner earnings yield ≫ Treasury, the business is pricing as a bargain.
- Track it over 5–10 years. Volatile owner earnings = unpredictable business = lower confidence.