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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