Owner’s Earnings

Owner earnings is a term coined by Warren Buffett, a well-known investor and business magnate, to refer to the cash generated by a business that is available for distribution to the owners of the business (i.e., the shareholders). It is calculated by taking the net income of a company and adding back any non-cash expenses (such as depreciation and amortization) and subtracting any capital expenditures (such as investments in property, plant, and equipment) that were made during the period.

The idea behind owner earnings is that it provides a more accurate picture of a company's true profitability and financial health, as it takes into account both the cash generated by the business and the cash required to maintain and grow the business. Buffett has often emphasized the importance of owner earnings in his investment decisions, as he believes that a company with strong owner earnings is more likely to be a profitable investment in the long run.

The formula for owner earnings is:

Owner Earnings = Net Income + Non-Cash Expenses - Capital Expenditures

Where:

• Net Income is the profit or loss of a business for a particular period, as reported on the income statement.

• Non-Cash Expenses are expenses that do not involve cash outflows, such as depreciation and amortization. These expenses are subtracted from net income because they do not represent actual cash outflows from the business.

• Capital Expenditures are investments in property, plant, and equipment that are made to maintain or grow the business. These investments are subtracted from net income because they represent cash outflows from the business that are not available for distribution to the owners.

It should be noted that the owner earnings concept is closely related to the Free Cash Flow (FCF) concept, which is a measure of a company's ability to generate cash that is available for distribution to all stakeholders after accounting for capital expenditures.

Free Cash Flow (FCF) = Net Income + Depreciation and Amortization - Capital Expenditures

It's important to note that both measures, Owner Earnings and Free Cash Flow are not GAAP( Generally Accepted Accounting Principles) figures and are therefore not necessarily comparable across companies. They are mostly used by investors and analysts to get a better understanding of a company's financial performance and potential for growth.