Owner earnings

Owner earnings has been discussed quite frequently in Warren Buffets letters to his shareholders. What is owner earnings? It is essentially the rfee cash flow to equity and it can be written in a simple formula.


Owner Earnings = Reported earings + depreciation,depletion,amortization + other non cash charges - average capital expenditure - change in working capital to maintain competitive position and unit volume

Through Warren's letters, we know that he would rather pay for $2 of unreported earnings than for a $1 of reported earnings and it is on this basis that he values his company. By conservatively predicting owner earnings 10 years into the future and using a suitable discount rate, he is able to find a range of intrinsic values for the company.