Owner Earnings: Buffett's Cash Metric That Beats Reported EPS

In Berkshire Hathaway's 1986 annual letter, Warren Buffett wrote that reported earnings were "an extraordinarily misleading number" and proposed a replacement. He called it owner earnings. Forty years later, it is still the single hardest-to-game profit metric in finance.

What exactly is owner earnings?

Owner earnings is Warren Buffett's preferred measure of how much cash a business actually generates for its owners after re-investing whatever is needed just to stand still. The formula, from the 1986 letter:

Owner Earnings = Reported Earnings + Depreciation, Depletion, Amortization, and certain other non-cash charges − the average annual amount of capitalized expenditures for plant and equipment required to maintain long-term competitive position and unit volume.

In simpler form, two near-equivalent versions are used in practice:

Income-statement version: Net Income + Non-cash charges − Maintenance Capex

Cash-flow-statement version: Operating Cash Flow − Maintenance Capex

The second is usually more accurate because operating cash flow already strips out non-cash items and adjusts for working capital — closer to what a private buyer would care about.

How is it different from free cash flow?

The single difference is the capex line. Free cash flow subtracts total capex (maintenance + growth). Owner earnings subtracts only maintenance capex.

Free cash flow is conservative; owner earnings is realistic. A high-growth company with heavy expansion capex looks cheap on owner earnings and expensive on free cash flow. A mature, slow-growth business looks similar on both.

The reason Buffett prefers owner earnings: a private owner of a business chooses whether to fund growth capex. They cannot choose whether to fund maintenance capex. So the only "owner-discretionary" cash flow is the latter.

How do you estimate maintenance capex?

Three approximations work in practice — none are perfect, but each gets you close. Companies almost never disclose maintenance capex directly:

Method 1: Depreciation as a floor. In a steady-state business, maintenance capex tracks depreciation. If Coca-Cola (KO) has roughly $1.4 billion in annual depreciation, then maintenance capex is approximately $1.4 billion plus a small inflation adjustment.

Method 2: Bruce Greenwald's regression. Take 5-7 years of total capex and revenue. Regress capex against revenue change. The slope gives growth capex per dollar of revenue; the intercept gives maintenance capex.

Method 3: Management commentary. Some companies — Microsoft (MSFT), Berkshire Hathaway (BRK.B) — explicitly break out maintenance vs. growth capex in the 10-K. Trust those numbers.

When in doubt, default to depreciation as a maintenance proxy. It usually understates maintenance capex by 10% to 20% in real life, which makes owner earnings a slightly aggressive number. That's why Buffett emphasizes a margin of safety on top.

Three real examples

Apple (AAPL): Operating cash flow of roughly $118 billion. Total capex around $10 billion. Of that, an estimated $6 to $7 billion is maintenance (the iPhone supply chain runs at scale; growth capex is more modest than for a younger company). Owner earnings: roughly $111 billion. Free cash flow: roughly $108 billion. The two converge for a mature, capital-light business.

Costco (COST): Operating cash flow near $11 billion. Total capex around $5 billion — but a meaningful chunk funds new club openings (growth, not maintenance). Estimated maintenance capex: roughly $2 to $2.5 billion. Owner earnings: approximately $8.5 to $9 billion. Free cash flow: roughly $6 billion. The gap matters because it changes what you would pay.

Berkshire Hathaway (BRK.B): The cleanest case because Buffett breaks out maintenance vs. growth capex in every 10-K. Maintenance capex roughly matches depreciation across the operating subsidiaries. Owner earnings comes in close to operating earnings — which is the entire point.

How do you use owner earnings in valuation?

The simplest application is the price-to-owner-earnings multiple. Replace earnings in P/E with owner earnings, and you get a cleaner read on what you are paying for actual distributable cash.

A second use: discounted cash flow models. Substituting owner earnings for free cash flow in a DCF shifts the implied intrinsic value upward for growth businesses and barely moves the number for mature ones. For an explanation of how DCF assumptions interact, see our piece on reverse DCF.

Buffett's own back-of-envelope rule from various Berkshire letters: a high-quality business with durable competitive advantages can fairly trade at roughly 10x to 15x owner earnings depending on growth and capital intensity. Below 10x with steady or rising owner earnings has historically signaled a mispricing.

Common mistakes investors make

Critics argue that owner earnings is too subjective because maintenance capex is an estimate. The risk is real. Three mistakes recur:

Mistake 1: Confusing depreciation with maintenance capex in inflationary periods. In a rising-price environment, replacement costs exceed historical depreciation by 15% to 30%. Owner earnings using book depreciation overstates the true free cash a business throws off.

Mistake 2: Ignoring stock-based compensation. Modern software companies issue billions in equity comp that doesn't show up in capex. Treat SBC as a real expense or owner earnings flatters the result.

Mistake 3: Applying it to early-stage businesses. Owner earnings is a mature-business metric. A company spending 80% of operating cash flow on growth has no defensible maintenance number yet. Use the framework only on businesses past their growth-capex peak.

When NOT to use owner earnings

Owner earnings breaks down for three types of companies. First: hyper-growth, where the maintenance/growth split is arbitrary. Second: banks and insurers, where capex is small relative to balance sheet leverage. Third: cyclicals, where one year's maintenance number distorts the steady-state.

For all three, free cash flow yield or return on invested capital is the better lens.

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