What is Owner Earnings?

Written by

Jae Jun

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What You Will Learn

  • What is owner earnings really is
  • How to calculate owner earnings to find how much the owner receives from his business
  • Examples of how to calculate owner earnings

The Difference between Earnings and Owner Earnings

In Wall Street terms, earnings is net income or EPS from the income statement. This is what most people grab and hold onto when the term earnings comes up.

But in value investing, earnings also refers to a FCF variation in the cash flow statement. i.e. owner earnings.

Before going further, since this is a subject that needs to studied closely, you can download a spreadsheet on owner earnings and changes in working capital. Simply click to share and unlock the download or click here to get it via email.

The whole concept of owner earnings is to figure out how much cash falls into the business owner’s pockets.

Net income and EPS is all very nice under accounting principles, but the actual dollar value that the business owner receives at the end of the day/month/year is much different.

This is why Buffett calls it owner earnings.

He likes to look at the real dollar amount an owner can withdraw from the business without affecting operations.

How is Owner Earnings Calculated?

As I brought up when discussing changes in working capital, Buffett first publicly announced the phrase owner earnings, in his 1986 Berkshire letter.

Here it is again.

“If we think through these questions, we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)” – 1986 Berkshire letter

This is a confusing block of text.

Breaking it down into digestible pieces, you have

Owner Earnings =

(a) Reported Earnings

+ (b) depreciation, amortization

+/- (b) other non cash charges

- (c) average annual maintenance capex

+/- changes in working capital

But when Warren Buffett wrote this in 1986, accounting rules were different with less information available.

Time to break this down a little further to make sense of it.

Some Differences between Owner Earnings in 1986 and Today

Reported Earnings: Easy. You can still find net income from the income statement.

Depreciation, depletion and Amortization: This number is provided in the cash flow statement.

Other non cash charges: Also found in the cash flow statement and refers to any charges which did not involve cash. Things like employee stock compensation.

Maintenance Capital Expenditure: This is the main difference between 1986 and today. Without a statement of cash flows it is difficult to calculate what the capital expenditure is, let alone maintenance capex.

That is why Buffett took the average approach.

But how did he calculate maintenance capital expenditure?

I believe Buffett looked at the depreciation and amortization figure and averaged it out over many years. The concept is that the D&A is a starting base figure for maintenance capex. (I wrote about this in my maintenance capex using depreciation article)

In other words, say I bought a computer for my business at a cost of $2,000 because I have to write articles and create stock value calculators to maintain my business.

If the computer has a lifespan of 5 years, that means I am going to depreciate $2,000 over 5 years. Using the straight line depreciation method, my depreciation is $400 for the next 5 years.

Basically, it is going to cost me $400 each year to maintain my business with the work I do on my computer.

But you and I have it good. The total capital expenditures is already located in the cash flow statement.

The only difficult part is to figure out how much of the total capex goes towards maintaining the business and growth.

You can use Bruce Greenwald’s method of calculating maintenance capex, but it does have its limitations. Or do what I do and just use the full capex figure because of the difficulties in accurately calculating it.

Better to be conservative, than underestimate maintenance capex and overpay for a stock.

Working Capital: Buffett also mentions “additional working capital” which is another way of saying “changes in working capital”. Remember that Buffett wrote that letter in 1986 before the official term “changes in working capital” existed.

Buffett is simply talking about the importance of cash flows due to working capital.

The increment he is referring to is the increase in the current operating assets in the “change in working capital” calculation. Whether the asset or liabilities side has the increment is going to determine whether you include or exclude the change in working capital.

  • If the change in working capital is negative, that means working capital increased as the company needs more capital to grow. This reduces cash flow and so it should reduce the owner earnings. (excluded in this case)
  • If changes in working capital is positive, that means working capital decreased as the company has more cash for the company to grow and play with. This increases cash flow and so it should added to owner earnings. (included in this case)

Just goes to show how ahead of the curve Buffett really was. Be sure to read the complete guide on changes in working capital to understand it completely.

This means that on any given year where additional working capital is required to maintain the business, it should be included in capex. Otherwise, the rest of working capital should be excluded from owner earnings.

Owner Earnings Formula for Today

Based on the discussion above, the owner earnings calculation now looks like this.

Owner Earnings =

     (a) Net Income

     + (b) depreciation, amortization

     +/- (b) other non cash charges

     – (c) annual maintenance capex (or the full capex)

    +/- changes in working capital

MSFT Owner Earnings Example

Let’s quickly go through an example for MSFT’s Trailing Twelve Months. All values taken from the stock value calculator.

Microsoft Owner Earnings Calculation

Microsoft Owner Earnings

 Using the TTM figures in millions:

  • Net income = $12,273
  • D&A = $5,990
  • Other non cash charges = $2,598
  • Capex = $6,018
  • Changes in working capital = ($1,471)

Because changes in working capital is negative, it should reduce FCF because it means working capital has increased and decreases cash flow (read the change in working capital article to fully understand this concept)

Therefore, Microsoft’s TTM owner earnings comes out to be:

12,273+5,990+2,598-6,018 - 1,471 = 13,372

The goal to calculating owner earnings properly is to understand the core concepts.


  1. calculate the change in working capital
  2. determine whether the cash flow will increase or decrease based on the needs of the business
  3. add or subtract the amount to cash flows to get owner earnings

Amazon Owner Earnings Calculation

Amazon Owner Earnings

Amazon Owner Earnings Shows Underlying Strength of Company

Using the same method, here are the calculations.

Using the TTM figures in millions:

  • Net income = $328
  • D&A = $5,909
  • Other non cash charges = $2,001
  • Capex = $4,424
  • Changes in working capital = $6,422
  • Owner Earnings = 328 + 5909 + 2001 – 4424 + 6422 = 10,236

Unlike Microsoft, Amazon changes in working capital is positive. It is added to the owner earnings as the company needs less capital to grow and so it will increase cash flow.

If you now divide the owner earnings by shares outstanding, you get owner earnings per share which is essentially the value investors version of EPS.

To better your understanding of owner earnings, download this spreadsheet and article on changes in working capital which includes owner earnings examples too.

  • alex

    It was my understanding that an increase in working capital is like capital maintenace as they are additional investments in the business to maintan or grow the business, and therefore should be included as part of the capital expenditure. These expenses are not part of the owner’s earnings because they are plowed back into the business.

    Therefore an increase in capital expenditure should be subtracted from the net income. In your calculation you turned that into a positive figure.

    So using your numbers, I have an owners earnings of 27,017.

  • http://www.oldschoolvalue.com Jae Jun

    Increase in working capital varies year to year so it would be better to average it out with previous years otherwise you will end up overstating or understating it quite often.
    That is why I eliminate working capital, unless there is a huge difference between the previous year of course.

  • somrh


    If D&A is higher than current capex, what reason do we have for believing that maintenance capex is lower than D&A?

    What if it’s the case that MSFT is withholding, for as long a possible, maintenance capex and therefore current capex understates maintenance capex.

    Or alternatively if MSFT is a sort of company that needs to make large purchases at infrequent times (say once every 10-20 years) then those purchases won’t show up on current CAPEX but will show up in D&A.

    Wouldn’t it be more conservative to use the higher D&A instead of the lower current CAPEX to estimate maintenance CAPEX? Or do we have reason to believe that D&A overstates maintenance CAPEX in this particular case?

  • Felix

    As per Alex,

    It is my same understanding that if you are to include changes in working capital to calculate owner’s earning, then if there is:

    1) Increase in Change to Working Capital (Incr), so negative on the cash flow statement, you would subtract it from the Net Income like it was an additional maintenance capital expenditure

    2) Decrease in Change to Working Capital Desc, so positive on the cash flow statement, you would add it to the Net Income like it was a relief of payables.

    I have the owner’s earnings of 27,017 as well.

    On a side note, there is a discrepancy with the owner’s earnings shown in your Stock Valuation PDF Sample of your Stock Valuator product (http://www.oldschoolvalue.com/blog/wp-content/uploads/OSV_Stock_Valuation_PDF_Sample.pdf)

    There, the example of MSFT for 2010, 2011, you do not include changes in working capital as per Mr. Buffett’s advice “Otherwise, the rest of working capital should be excluded from owner earnings.”

    Any comment on that?


  • Alex

    Yes that was my point. The math on Jae Jun’s calculation is reversed. Subtracting a negative number yields an addition.

  • http://www.oldschoolvalue.com Jae Jun

    ah I see what you were referring to.
    The capex number I changed to a +ve value to make the calculation make sense on paper instead of using an excel version.

    It’s the working capital change value I got mixed up with. Should be a plus as you said.

  • lasse

    I can’t see how you calculate the values for ‘other current assets’ , ‘other current liabilities’ and ‘other working capital’ when comparing to the cash flow statement. Can you be please explain ?

  • http://www.valuefolio.com Daniel Sparks

    I just want to make sure I understand this. I noticed the TTM Owner earnings for MSFT you came up with was: 27,017. But on your screen shot it says: 29,065. When I do the math from the numbers in the screenshot I get 27,017. Is there a reason for this difference?

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  • http://www.oldschoolvalue.com Jae Jun

    @ lasse,

    Those values come directly from the data source.

    Other current assets: The increase or decrease between periods of the other current assets. Other current assets includes all other current assets that are not assigned to accounts receivable and inventories.

    Other current liabilities: The increase or decrease between periods of other current assets. Other current liabilities includes all other current liabilities that do not fit into short-term debt.

    Other working capital: The increase or decrease between periods of the working capital. It is the amount left to the company to finance operations and expansion after currnet liabilities have been covered.

  • http://www.oldschoolvalue.com Jae Jun

    @ Daniel,

    You are correct. The reader above mentioned that I had my symbols reversed. The correct number is 27,017.

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  • Chee Siang LIM

    Why is it that the owner earnings include “Changes in net working capital” when you have argued previously that such changes should not be included in owner earnings?

  • http://www.oldschoolvalue.com/ Old School Value

    Remember that to eliminate the effects of changes in working capital, it has to be either added or subtracted. E.g. if changes in working capital is $100, you need to subtract it out. So in the formula, it is included, but the concept is removing it.

  • Mark Jacob

    Hi Jae. This might seem like a silly question but why do we deduct maintenance capex from net income? Isn’t net income by definition an amount after any expenditure, including maintenance capex? It seems to me like you are double counting the expense

  • veganinvestor

    It sounds like Buffett is saying working capital should be included as maintenance capex, or not included at all. Thus it should only decrease owner earnings, and not increase it. Your example is increasing owner earnings, can you elaborate? Thanks.

  • http://www.oldschoolvalue.com/ Old School Value

    If a number can decreased, then the number should also be able to be increased if needed.
    Changes in working capital is removed or added depending on what the value is.
    In the example, since changes in working capital is a -ve number, you need you add it to cancel it out.

  • lcchong76

    What do you think about Deferred Taxation? Should we include Deferred Taxation in Owner Earnings calculation?

  • http://www.oldschoolvalue.com/ Old School Value

    no because deferred tax is going to be paid out. It’s not something that owners can take out of the business.

  • lcchong76

    Good point, thanks.

  • Kalani King

    You made a mathematical error in Changes in Working Capital for the last MSFT example. Although you did say ($1,024), you added instead of SUBTRACTING this figure to the Owners Earnings.

  • http://www.oldschoolvalue.com/ Old School Value

    Both correct actually.
    If I did + (1,024) it would be incorrect, but since I did + 1024, it is the same as doing – (1,024).

  • Dvir

    Could you explain the reason that “Acquisitions” are excluded (e.g do not reduce the owner earnings)? One could claim that these are equivalent to change in working capital devoted to non-organic growth.

  • http://www.oldschoolvalue.com/ Old School Value

    Can you clarify what you mean? Do you mean acquisitions should be included in capex?

    Acquisitions are mostly to grow. It’s a grey area and up for debate, but the reason a company decides to acquire another in the first place is for growth. Not for maintenance. So it wouldn’t be included anyways.

  • Dvir

    My point was that when an acquisition is made, $$ are taken off the cash flow and not “returned to the owners”.

    I understand you’re saying that “for growth” investments are excluded from the Owner Earnings. Why ? what do I miss here?

  • http://www.oldschoolvalue.com/ Old School Value

    That’s a common misconception. A lot of people also say the same thing with dividends since the company pays it out and not returned to owners.

    The purpose of FCF or owner earnings is to also see how much the business generates and the owners can take out if they wanted to. Acquisitions is already included in the capex line so it’s not being ignored. Just need to split it up.

  • Dvir

    Sorry for beeing so slow.. I am not sure I follow you.

    Take Microsoft in your above example: The 9,588 (mostly the Skype acquisition, I assume) is not “included in the capex line”, but appears in a line of its own.

    Why is it ignored in the FCF calculation ?

  • Gopi

    Hi, It doesn’t actually make sense to consider net changes in working capital for calculation of owner earnings, when the established school of thoughts have not mentioned the same. What if the company has huge credits outstanding to their suppliers which will artificially give a positive figure to us… Wont it be mis-leading all our calculations?

    Thanks n Rgrds,

  • Andi

    Hi Jae,
    how are you?
    I really enjoyed reading your article on owner earnings, very good explanation!
    I still have a question and I hope you can give me a good answer to it:
    If I take Owner Earnings into account for predicting the future (e.g. I calculate the growth rate of the last ten years of oe and predict an ongoing growth for the next ten years to use a discount model afterwards), wouldn’t it make sense to use total capital expenditures to calculate OE instead of maintenance CAPEX? The growth from one year to another (in the past) is partly due to growth CAPEX from the year before, so if I hadn’t used the amount for growth last year I wouldn’t have the OE I got this year…Am I wrong?

  • http://www.oldschoolvalue.com/ Old School Value

    The easiest way is to just use total capex because there is no way to calculate maintenance capex mathematically. There is no set formula. And management does not explicitly provide the numbers either.

    To err on the safe side, use the total capex.
    I just wanted to show how Buffett thought about it and how he talked about it.

  • Yuki

    How did you arrive to 1024 for the change in working capital? Isn’t is 1035+382-166-87-79-393? Doesn’t the increase in payables (87) and increase in other current liabilities (79) decrease the working capital? and 393 is also a decrease in working capital. So the total change in working capital is 692?

    I’m probably wrong. Could you tell me where I’m wrong?

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