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Jae Jun
Jae Jun
Articles (5983)  | Author's Website |

The Difference Between Earnings and Owner Earnings

June 16, 2012 | About:

In Wall Street terms, earnings is net income or EPS from the income statement. This is what most people grab and hold onto when the term earnings comes up.

But in value investing, earnings also refers to a FCF variation in the cash flow statement. i.e. owner earnings.

The whole concept of owner earnings is to figure out how much cash falls into the business owner’s pockets. Net income and EPS is all very nice under accounting principles, but the actual dollar value that the business owner receives at the end of the day/month/year is much different. This is why Buffett calls it owner earnings. He likes to look at the real amount an owner receives from his business.

How is Owner Earnings Calculated?

As I brought up when discussing changes in working capital, Buffett first publicly announced the phrase owner earnings, in his 1986 Berkshire letter.

Here it is again.

“If we think through these questions, we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)” – 1986 Berkshire letter
Now that is clearly a confusing block of text.

Breaking it down into digestible pieces, you have

Owner Earnings =

(a) Reported Earnings

+ (b) depreciation, amortization

+/- (b) other non cash charges

- (c) average annual maintenance capex

But when Warren Buffett wrote this in 1986, accounting was different than today with less information available. Time to break this down a little further to make sense of it.

Some Differences between Owner Earnings in 1986 and Today

Reported Earnings: Easy. You can still find net income from the income statement.

Depreciation, depletion and Amortization: This number is provided in the cash flow statement.

Other non cash charges: Also found in the cash flow statement and refers to any charges which didn’t really involve any cash.

Maintenance Capital Expenditure: This is the main difference between 1986 and today. Without a cash flow statement it is difficult to calculate what the capital expenditure is, let alone maintenance capex. That is why Buffett took the average approach.

But how did he calculate maintenance capital expenditure?

I believe Buffett looked at the depreciation and amortization figure and averaged it out over many years. The concept is that the D&A is a starting base figure for maintenance capex. (I wrote about this in my maintenance capex using depreciation article)

In other words, say I bought a computer for my business at a cost of $2,000 because I have to write articles and create stock value calculators to maintain my business.

If the computer has a lifespan of 5 years, that means I am going to depreciate $2,000 over 5 years. Using the straight line depreciation method, my depreciation is $400 for the next 5 years.

Basically, it is going to cost me $400 each year to maintain my business with the work I do on my computer.

But you and I have it good. Capital expenditures is located in the cash flow statement. The only difficult part is to figure out how much of the total capex goes to maintaining the business and growth.

You can use Bruce Greenwald’s method of calculating maintenance capex, but it does have its limitations, or do what I do and just use the full capex figure since it is very difficult to accurately calculate it.

Working Capital: Buffett also mentions “additional working capital” in the paragraph. He says that additional working capital “should be included in (c)”. This means that on any given year where additional working capital is required to maintain the business, it should be included in capex. Otherwise, the rest of working capital should be excluded from owner earnings.

(Refer to another explanation towards the end of the previous article on changes in working capital)

Owner Earnings Formula for Today

Based on the discussion above, the owner earnings calculation now looks like this.

Owner Earnings =

(a) Net Income

+ (b) depreciation, amortization

+/- (b) other non cash charges

- (c) annual maintenance capex (or the full capex)[/url]

+/- changes in working capital

MSFT Owner Earnings Example

Let’s quickly go through an example for MSFT’s Trailing Twelve Months. All values taken from the [url=http://www.oldschoolvalue.com/stock-valuation-spreadsheet.php]stock value calculator.


  • Net income = $23,344
  • D&A = $2,859
  • Other non cash charges = $4,163
  • Capex = $2,325
  • Changes in working capital = ($1,024)
MSFT TTM Owner Earnings =


+ $2,859

+ $4,163

- $2,325

- ($1,024)

= $29,065

Try it with the numbers from Morningstar and see what you get.

If you now divide the owner earnings by shares outstanding, you get owner earnings per share which is essentially the value investors version of EPS.

It may take some practice at first and depending on the type of company you look at, owner earnings may be more difficult to calculate, but with practice, you will have taken one step closer to being like Warren Buffett.

About the author:

Jae Jun
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.

Visit Jae Jun's Website

Rating: 4.4/5 (24 votes)


Ranjitsudan - 5 years ago    Report SPAM
Nice article... some company's gives a breakdown of maintenance CAPEX in 10-K, otherwise you can ask investor relation department, they generally have split of CAPEX number.
Jae Jun
Jae Jun premium member - 5 years ago
thanks for the tip. But would IR have the maintenance capex details for more than 5 years going back?
Ney123456789 - 5 years ago    Report SPAM
Hi Jae...

It looks like the indirect method to calculate operational cash...

Is owner earnings the same as o- cash?

Please leave your comment:

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