Warren Buffett Owner Earnings — Formula & Examples
The cash-flow measure Buffett defined in his 1986 shareholder letter — what it is, how to calculate it, and a worked example.
What are owner earnings?
In the appendix to his 1986 letter, Buffett argued that reported net income misstates what a business truly produces for its owners. His alternative — owner earnings — is the cash an owner could withdraw each year while keeping the business fully competitive.
The formula: Owner Earnings = Net Income + Depreciation & Amortization + other non-cash charges − average annual maintenance capital expenditure (the capex needed just to hold unit volume and competitive position).
Worked example
A simple illustration for a stable industrial company (figures in $M):
| Line item | Amount | Note |
|---|---|---|
| Net income | +100 | From the income statement |
| Depreciation & amortization | +40 | Non-cash charge added back |
| Other non-cash charges | +5 | e.g. stock-based comp, impairments (judgment required) |
| Maintenance capex | −35 | Estimated — the hard, subjective part |
| Owner earnings | = 110 | The figure to value, not the reported 100 |
Buffett: "These earnings calculations do not yield the deceptively precise figures provided by GAAP… but a fuzzy answer to the right question beats a precise answer to the wrong one."
Owner earnings vs free cash flow vs net income
- Net income includes non-cash noise and ignores the capex needed to stay in business.
- Standard FCF subtracts all capex — including growth capex — which can understate a reinvesting compounder.
- Owner earnings subtracts only maintenance capex, isolating the true distributable yield of the existing business.
- Estimating maintenance capex requires judgment: compare D&A to capex over a full cycle, or use management disclosure.
- Use owner earnings as the cash flow in a DCF when valuing the business the way Buffett does.
The $25 million lesson that changed Buffett
In 1972 the sellers of See's Candies asked $30 million; Buffett, trained on Graham's cigar butts, refused to go above $25 million — roughly three times book value, a price the old Buffett would never pay. The deal nearly died over $5 million. Charlie Munger pushed back: a beloved brand with loyal customers and genuine pricing power deserved a premium.
They paid the $25 million. See's went on to ship more than $1.65 billion of cumulative pre-tax earnings back to Omaha while needing almost no additional capital — raising prices every year without losing a single loyal customer. Buffett later called it 'the prototype of a dream business' and credits this one purchase with rewiring how he invests.
Quality compounds quietly for decades. Temperament and a clear circle of competence beat chasing the cheapest price.
The only deal Munger ever pushed
In the depths of the 2008 crisis, Munger did something he had never done before: he actively lobbied Buffett to invest in BYD, a Chinese battery and car maker led by engineer Wang Chuanfu — a man Munger described as "a combination of Thomas Edison and Jack Welch". The conviction came through Li Lu, whose circle of competence covered what Omaha's did not.
Berkshire paid $232 million for about 10% of the company — a tiny position by its standards, in an industry Buffett had publicly sworn off. At its 2022 peak the stake was worth roughly $9 billion, close to a forty-fold gain, before Berkshire began trimming.
A circle of competence can be extended honestly — by trusting someone who genuinely has one where you do not.
Related tools
Frequently asked questions
Where did Buffett define owner earnings?
In the appendix to his 1986 Berkshire Hathaway shareholder letter, discussing the Scott Fetzer acquisition.
How do I estimate maintenance capex?
Common approaches: average capex over a full business cycle minus identifiable growth projects, comparing capex to D&A trends, or management disclosure. It is an estimate, not a precise figure.
Is owner earnings the same as free cash flow?
No. FCF subtracts all capital expenditure; owner earnings subtracts only the portion needed to maintain current competitive position, so it can be higher for companies investing heavily in growth.
Valuefocus walks you through owner-earnings-based valuation step by step, the way Buffett describes it.
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