The formula
Owner earnings = Reported earnings + D&A + other non-cash - average maintenance CapEx.
Maintenance vs. growth CapEx
Reported CapEx is one line. Maintenance CapEx (the bit needed to stand still) is not disclosed. Three practitioner heuristics:
- Set maintenance CapEx equal to D&A. Defensible for steady-state firms.
- Take a five-year average of CapEx in a no-growth year. Works if the firm has had one.
- Bottom-up from PP&E disclosures: replacement cost of existing assets divided by useful life.
Damodaran has written extensively on the split[Damodaran].
Worked walk
Reported earnings$96,995
Add: depreciation and amortization$11,700
Add: other non-cash items$0
Less: average maintenance CapEx($7,500)
Owner earnings$101,195
Why long-horizon value investors prefer it
Standard FCF subtracts the whole CapEx bill, including growth spending. For a firm whose growth CapEx will not produce a return for years, that understates the cash the owner can actually take. Owner earnings is closer to the maximum cash the owner can pull while leaving the business intact. Buffett re-emphasised the construct in the 2023 letter[2023 letter].
Documented criticisms
- Maintenance vs. growth split is ambiguous and prone to gaming.
- Does not handle changes in working capital separately from earnings quality.
- Not directly comparable to OCF-based metrics across analysts.