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  5. Owners' Earnings (Buffett)
Valuation

Owners' Earnings (Buffett)

Warren Buffett’s preferred cash-flow measure: net income plus non-cash charges minus maintenance capex.

Definition

Introduced by Warren Buffett in his 1986 letter, Owners' Earnings is a more conservative version of free cash flow that explicitly separates maintenance capex (needed to keep the business running) from growth capex (needed to expand it). The idea is that an owner can extract maintenance-only FCF without harming the business. Because there is no GAAP definition of maintenance capex, the measure requires judgment — Buffett describes it as 'approximately right' rather than 'precisely wrong'.

Formula

Owners' Earnings ≈ Net Income
                 + Depreciation & Amortisation
                 + Other non-cash charges
                 - Maintenance CapEx
                 - Working capital additions

Worked example

A consumer brand reports $1.5B net income, $300M D&A, $200M total capex of which $150M is judged maintenance, and $50M working capital build. Owners' Earnings ≈ 1500 + 300 - 150 - 50 = $1.6B. Per share with 500M outstanding = $3.20. At a market price of $48, the 'Buffett' earnings yield is 6.7%.

How ARIA Analyst uses it

ARIA computes Owners' Earnings using a heuristic that splits capex into maintenance (= D&A) and growth, and reports it in the Quality module alongside ROIC.

Related terms

  • Free Cash Flow (FCF)

    Cash from operations minus capital expenditures — the cash a business actually generates for owners.

  • FCF Yield

    Free cash flow per share divided by share price — the "earnings yield" of cash.

  • Discounted Cash Flow (DCF)

    Intrinsic value of an asset as the present value of its future cash flows.

  • Return on Invested Capital (ROIC)

    NOPAT divided by total invested capital — true return on operating capital, independent of capital structure.

See Owners' Earnings (Buffett) in action on any asset

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