Owner earnings: what Buffett actually looks at
The whole exercise is separating the capex that keeps the lights on from the capex that builds the future. The accounts refuse to.
Estimate what the business could pay you without shrinking.
How Owner earnings: what Buffett actually looks at works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The divergence that precedes most disasters
Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.
- 1
Start from reported earnings and undo the accounting
Add back depreciation and amortisation, which are non-cash. Then subtract the capital spending genuinely required to maintain the business at its current size and competitive position. What is left is roughly what an owner could pocket.
- 2
Maintenance capex is the whole difficulty, and it is not disclosed
The accounts report total capex. They do not split it into 'replacing worn-out machines' and 'building a new factory'. But those are completely different things: the first is a cost of staying alive, the second is an investment in growth.
You have to estimate it. Depreciation is a rough proxy. Comparing capex to sales over a long period, in a year the company was not expanding, is better.
This is why the number is an estimate and Buffett said so. An approximately right figure beats a precisely wrong one.
- 3
Why it beats free cash flow
Free cash flow subtracts all capex, which punishes a company investing heavily in genuine growth and flatters one that is quietly under-investing and liquidating itself. Owner earnings tries to see through both.
- 4
And why it beats reported profit
Because depreciation charges rarely equal the real cost of replacement, especially with inflation. A company can report handsome profits while the true cost of keeping its equipment current is quietly rising above the charge in the accounts.
You can estimate maintenance capex for a company and defend the estimate.
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The whole exercise is separating the capex that keeps the lights on from the capex that builds the future. The accounts refuse to.
Institutional holdings read straight from SEC 13F filings, with the changes, which is the part that matters.