Definition
Owner Earnings is Warren Buffett's preferred measure of a business's true cash-generating power. Introduced in his 1986 letter to Berkshire Hathaway shareholders, it adjusts reported net income for the non-cash depreciation charge, then subtracts only the capital spending needed to maintain (not grow) the business.
Formula
Owner Earnings = Net Income + D&A − Maintenance CapEx
Net Income = Reported after-tax profit
D&A = Depreciation & amortisation (non-cash charge added back)
Maintenance CapEx = Capital spending to maintain current operations (not growth CapEx)
The hard part is estimating maintenance CapEx — companies don't report it separately. A common proxy is 70-80% of total CapEx for a mature company, or using depreciation itself as an approximation.
Owner Earnings vs Free Cash Flow
| Owner Earnings | Free Cash Flow | |
|---|---|---|
| Starts from | Net income | Operating cash flow |
| CapEx treatment | Subtracts maintenance CapEx only | Subtracts total CapEx |
| Growth investment | Excluded (it's optional spending) | Included (lowers FCF) |
| Best for | Assessing sustainable earning power | Assessing actual cash generation |
Worked example
Worked example: BHP Group (BHP.AX)
Net IncomeUS$7.9B
Depreciation & AmortisationUS$4.8B
Total CapExUS$7.1B
Estimated maintenance CapEx (75%)US$5.3B
Owner Earnings = $7.9B + $4.8B − $5.3BUS$7.4B
BHP's reported free cash flow (operating cash flow minus total CapEx) was lower because it includes growth CapEx. Owner Earnings strips that out, showing the cash the business could return to shareholders while keeping operations intact.