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Gordon Pape
Vera Yuan

New Feature Announcement: Warren Buffett’s Owner Earnings Per Share

How to calculate owner EPS

April 23, 2016 | About:

In the 1986 Berkshire Hathaway shareholder letter, Warren Buffett (Trades, Portfolio) defined owner earnings as follows:

"These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges...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))...Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (c) must be a guess - and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes - both for investors in buying stocks and for managers in buying entire businesses...All of this points up the absurdity of the 'cash flow' numbers that are often set forth in Wall Street reports. These numbers routinely include (a) plus (b) - but do not subtract (c)."

The formula

Owner Earning Per Share = (Net Income + Depreciation, Depletion & Amortization + (Employee Stock Compensation + Change In Deferred Tax) - 5Y Average of Maintenance Capital Expenditure + Change In Working Capital) / Shares Outstanding (Diluted Average)

Owner earnings per share (TTM) calculation

We will use Wal-Mart Stores Inc. (WMT) as an example. The latest quarter end is Jan. 31.

1. Start with "Net Income" from income statement. Wal-Mart's net income for the trailing 12 months (TTM) ended in January was $14.694 billion.

2. "Depreciation, Depletion and Amortization" is from cash flow statement. This needs to be added back because company does not actually need to pay cash for it. It is a non-cash item. Wal-Mart's depreciation, depletion and amortization for the trailing 12 months (TTM) ended in January was $9.454 billion.

3. Other non-cash charges usually include "Employee Stock Compensation" and "Change In Deferred Tax":

Wal-Mart's employee stock compensation for the trailing 12 months (TTM) ended in January was zero. GuruFocus adds this back to net income because this is a non-cash item. For most companies, employee based compensation expense is included in cost of goods sold, research and development, and selling, general and admin. expense. It is paid in shares, not in cash. Therefore, it needs to be added back.

Wal-Mart's change in deferred tax for the trailing 12 months (TTM) ended in January was $-672 million.

4. Average maintenance capital expenditure over a business/industry cycle: Five-year average maintenance capital expenditure = $8.39653 billion.

In the previous quote, Warren Buffett (Trades, Portfolio) said “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.

Companies usually do not report maintenance capital expenditures and growth capital expenditures separately. “Since (c) must be a guess,” here GuruFocus uses estimated numbers and averages them over five years.

It is usually best to take a long-term average of maintenance capital expenditure. Ideally this would be as long as 10 years and include at least one economic downturn. However, since many companies do not have as long as 10-year history, here GuruFocus uses the latest five years data to do the calculation.

The following shows how to estimate maintenance capital expenditure.

First, calculate the revenue change regarding to the previous year. If the revenue decreased from the previous year, then the Maintenance Capital Expenditure = Capital Expenditure (positive).

Second, if the revenue increased from the previous year, then calculate the percentage of Net PPE as of corresponding revenue.

Growth Capital Expenditure = Percentage of Net PPE as of corresponding Revenue * Revenue Increase

Third, calculate Capital Expenditure (positive) - Growth Capital Expenditure.

If [Capital Expenditure (positive) - Growth Capital Expenditure] was negative, then the

Maintenance Capital Expenditure = Capital Expenditure (positive).

If [Capital Expenditure (positive) - Growth Capital Expenditure] was positive, then the

Maintenance Capital Expenditure = Capital Expenditure (positive) - Growth Capital Expenditure

Fourth, get the average of the five-year maintenance capital expenditures.

Wal-Mart's five-year Average Maintenance Capital Expenditure = $8.39653 billion.

5. "Change in Working Capital" is from the cash flow statement. Wal-Mart's Change in Working Capital for the trailing 12 months ended in January was $2.117 billion.

Note: GuruFocus' Change in Working Capital is provided by Morningstar. It is calculated by adding the items under "Change in operating assets and liabilities" (may refer to a different name for different company) section in the cash flow statement from original financial report. It sometimes includes non-current parts of assets and liabilities.

6. Wal-Mart's average diluted shares outstanding for the three months ended in January was $3.217 billion.

Owner Earning Per Share (TTM) = (Net Income + Depreciation, Depletion & Amortization + (Employee Stock Compensation + Change In Deferred Tax) - 5Y Average of Maintenance Capital Expenditure + Change in Working Capital) / Shares Outstanding (Diluted Average)

= (14,694 + 9,454 + 0 – 672 – 8,396.53 + 2,117)/3,217


Price to Owner Earnings (TTM) = Current Price / Owner Earning Per Share (TTM)



Where to find owner earnings on GuruFocus

From the above calculation, we can estimate the owner earnings per share (ttm) for Wal-Mart Stores is $5.35, the current share trading price for now is $69.21, the current price to owner earnings per share (ttm) ratio is 12.95.

There are a few places where you can find companies’ owners earnings or price to owner earnings ratios on GuruFocus.

1. Stock summary page

Walmart summary

Walmart's Price/Owner Earnings (TTM) is ranked higher than 71% of the 185 companies in the Global Discount Stores industry.

Walmart's current Price/Owner Earnings (TTM) is 12.95. Over the past 10 years, the highest Price/Owner Earnings (TTM) Ratio of Wal-Mart was 33.11. The lowest was 10.2, and the median was 16.49.

2. 15-year financials page

Walmart's 15-year financials

3. All-in-One Guru Screener (will be available soon => Please see “8. Customized Screener” at the end of this article)

GuruFocus will also add Price/Owner Earnings in the All-in-One Guru Screener. Click Valuation Ratio tab right next to Fundamental tab, on the fifth column, there will be one filter called Price/ Owner Earnings (TTM) right under Price/Earnings Power Value filter. You can set up the range you want and see a list of stocks that qualifies for this criterion.

In using this screener, please remember that this is an idea generator and that further research and a more detailed valuation should be performed. Each stock is an individual case that warrants deeper study.

4. Portfolio view and screener customized view

Click “My Portfolios”, under ”Overview” tab, click “Customize this View.

Owner Earnings per Share (TTM) is under the “Fundamental” column. Price/Owner Earnings (TTM) is under “Valuation” column. Then click ”Save View.

Customized view in the All-in-One Guru Screener can be done in the same way.

6. Interactive chart

Walmart interactive chart

7. Definition page

WMT’s Owner Earnings Per Share (TTM) page.

WMT’s Price to Owner Earnings (TTM) page.

8. Customized Screener

Go to “All-in-one guru screener”, Click “Customized” (the one with the red “new” sign), click “Create New Filter”, then type in “Owner Earnings”, you should be able to see a drop down menu with “Owner Earnings per Share (TTM)” and “Price to Owner Earnings (TTM)” showed up. Using “Price to Owner Earnings (TTM)” as an example, click on it and then click on “Save”.

After you click “Save”, you should be able to see the following filter. You can set your own Min and Max value and then get the companies pass the screener.

Owner earnings per share is just another feature we have added to our subscribers.

UPDATE: To be conservative, we will remove the stock-based compensation in the calculation. It will be applied to all companies by the end of May 2016. 

If you are not a Premium Member, we invite you for a 7-day free trial.

About the author:

Vera Yuan
Gordon Pape is the best-selling author/co-author of many acclaimed investment books, including the recently-published Sleep-Easy Investing (Viking Canada ). He is also publisher and editor of five investment newsletters, including the Internet Wealth Builder, Mutual Funds Update, The Income Investor, and The Canada Report, which was created specifically for U.S. residents interested in investing in Canada . He is a columnist for several magazines and websites and a frequently quoted media source. He has been a featured speaker at numerous events including the World Money Show in Orlando . His websites can be found at www.BuildingWealth.ca and www.TheCanadaReport.com.

Rating: 4.7/5 (7 votes)



Batbeer2 premium member - 1 year ago

Very interesting, thanks!

I think this might work for some companies and may be dangerous when used with others.

For many retailers a huge part of their growth expense is the increase in inventory as they grow. Accountants will say inventory is a current asset but for a retailer (not in liquidation), inventory is very much a fixed asset. The retailer will forever have cans of soup sitting on its shelves. When they open new shops, someone has to pay for that extra inventory. That very real expense will never show up as GAAP capex though.

Accountants can disagree if they want but the reality is that the inventory in many stores is worth more than the building.

For this and other reasons, I think the approach you suggest is best used on companies with very significant PP&E to total tangible assets (perhaps >50%).

The formula will be less meaningful for a company like Car Mart with high inventory relative to its PP&E. Or a bank. Conversely, the results will be more meaningful for a comapany with significant PP&E to total tangible assets. Railroads and electric utilities come to mind.

In practice I suggest adding a filter or perhaps warning for companies with relatively low PP&E to total (tangible) assets when calculating the estimate of owner earnings with this formula.

Just some thoughts.

Mhho92 premium member - 1 year ago

This is a very useful feature, especially to track acquisitive companies (to add back amortization of intangibles). Well done !

As a suggestion, can we get a version of this owner's earning that does not add back stock-based compensation? If you add back stock comp, you need to use a different denominator -- period-end share count + options/RSU/etc outstanding (instead of the diluted average for past period).

Stock comp are real expenses especially if you look at tech companies -- e.g. GOOG, INTU, QCOM and even non-tech companies like ACN, IT, FLT. Simply do a "stock comp" / "operating expense" and you'd find out it's a huge % for these companies.

Dirt2624 premium member - 1 year ago

We all have our own ways to calculate owners earnings. For instance I use the a 10 year average of capex/ppe to determine what capex should be in the current year. It works just fine. It will be interesting to see how my version compares with yours going forward.

Thanks for your continued great work,


Oanr_halt - 1 year ago    Report SPAM

Very interesting indeed. Some commentators already pointed out the problems with working capital and capex: these things are difficult to grasp, as they depend on the sector, the companies act in. So it is very difficult to apply the same formula for all sectors.

One other thing: I usually do not add back stock-based compensation, at least not automatically, since I regard this as a real cost, although non-cash. I only add back a part of stock-based compensation. How much? Well, that depends on my 'feelings', how the company uses stock-based compensation...

Do you regard 'adding back stock-based compensation' accounted for by using the diluted share count? What are your thoughts on this?

Gurufocus premium member - 1 year ago

We will removed the stock-based compensation in the calculation.

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