Warren Buffett · Free lesson guide

Owner earnings: a truer measure of cash flow

Reported earnings answer an accounting question. Buffett wanted an answer to an ownership question: how much cash could actually be taken out of this business each year without weakening its competitive position? His owner-earnings definition, laid out in the 1986 Berkshire appendix, is deliberately less precise than EPS — and he argued that an approximately right number beats a precisely wrong one.

ValuationIntrinsic valueFinancial analysis

What you'll learn

The owner-earnings formula and why Buffett places maintenance capex at its centre
How to separate maintenance capital expenditure from growth capital expenditure
Why depreciation is a real economic cost even though it is a non-cash charge
Why two businesses with identical net income can be worth very different amounts
Where the estimate is unavoidably subjective, and how to handle that honestly

Key concepts

Owner earnings: Reported net income, plus depreciation, amortisation and other non-cash charges, minus the average annual capitalised expenditure the business requires to maintain its unit volume and competitive position. The last term is an estimate, and it is where all the judgement lives.
Maintenance versus growth capex: Companies report total capital expenditure, not the split. Maintenance capex keeps the current earning power intact; growth capex buys additional earning power. Treating all capex as maintenance understates a growing business; treating none as maintenance flatters a capital-hungry one.
Why depreciation is not free money: Buffett has been scathing about EBITDA for exactly this reason: machines wear out and must be replaced with real cash. Adding back depreciation without subtracting the replacement spending produces a number that describes no business anyone actually owns.
Approximately right: The formula returns a range, not a figure. Buffett's argument is that the discipline of estimating maintenance capex forces you to understand the physical and competitive reality of the business — which is the actual output, more than the number.

The same profit, two different businesses

Take two companies each reporting one hundred million in net income. The first is a branded consumer business that spends fifteen million a year keeping its plants running. The second is a heavy manufacturer that must spend eighty million just to stand still. Their earnings per share can look similar and their owner earnings differ by a factor of five. Almost every serious valuation mistake made by beginners comes from ignoring this gap, and almost every 'cheap on a P/E basis' trap contains it.

Estimating maintenance capex without inside information

There is no reported line for it, so analysts use proxies: depreciation as a floor, multi-year averages of capex against unit volume, or capex in years when the business explicitly did not expand. Each is imperfect. The productive habit is to compute a range using two methods, state your assumption in writing, and check it against management's own commentary about capacity — then treat any business where the range is enormous as harder to value, which is itself useful information.

What the number is for

Owner earnings feed directly into the intrinsic-value estimate, and their stability over a cycle is a better test of a moat than any margin figure. A business whose owner earnings barely move through a recession is telling you something about pricing power that no strategy deck can. That is why Buffett treats the calculation as diagnostic rather than merely arithmetic.

How this connects to Warren Buffett

Owner earnings is the bridge between Buffett's qualitative work — competence, moats, management — and a number he can discount. It is also the clearest inheritance from Graham, translated from balance-sheet safety into cash-flow safety.

Explore all Warren Buffett courses Valuation Demystified: The See's Candies Acquisition

Inside the membership

Owner Earnings: A Truer Measure of Cash Flow

Part of “Valuation Demystified: The See's Candies Acquisition” · 8 min

The complete lesson with Buffett's original 1986 formulation and commentary
A worked owner-earnings calculation on a real reported income statement
The valuation framework saved to your Playbook for reuse
Audio summary in your language plus Master chat follow-ups

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