Owner Earnings.

Owner earnings is a concept popularized by Warren Buffett in his 1986 letter to Berkshire Hathaway shareholders as a more accurate measure of a company's true economic profit than reported net income. The calculation starts with net income, adds back non-cash charges such as depreciation and amortization, and then subtracts the capital expenditures required to maintain the business's competitive position and unit volume over the long run. The result represents the cash that could theoretically be distributed to shareholders each year without impairing the company's ability to sustain its operations and earnings power. Buffett distinguished owner earnings from free cash flow calculations that subtract all capital expenditures, noting that growth capex — spending to expand rather than merely maintain — should not be deducted because it is optional. The metric is particularly useful for comparing capital-intensive businesses, where heavy depreciation charges can make earnings appear much lower than the actual cash the business generates. It also exposes businesses that report strong earnings while quietly requiring heavy ongoing reinvestment to stay competitive — so-called "earnings mirages." Calculating owner earnings demands judgment about which portion of capex is maintenance versus growth, making it less mechanical than standard accounting ratios but more informative for the patient analyst willing to read capital expenditure disclosures carefully. Value investors regard owner earnings as one of the cleaner lenses through which to estimate intrinsic value, often capitalizing the figure at an appropriate discount rate to arrive at a fair price for the whole enterprise.