Owner earnings

Valuation

Buffett's estimate of the cash an owner could actually withdraw each year: operating cash flow minus capital spending minus stock compensation.

Formula

Owner earnings = operating cash flow − capex − stock-based compensation; P/OE = market cap ÷ owner earnings; OE yield = owner earnings ÷ market cap

Why it matters

Reported net income is an accountant's opinion; owner earnings ask the owner's question — after paying to keep the business running, how much cash could I take out this year without harming it? Buffett introduced the idea in his 1986 shareholder letter as earnings plus depreciation minus required capex. We compute it from operating cash flow, which already adds back non-cash charges, and additionally subtract stock-based compensation: SBC is a genuine cost paid in equity rather than cash, and treating it as free is how many modern income statements flatter themselves.

What good looks like

Compare P/OE with the ordinary P/E: when P/OE is far higher, accounting earnings overstate the cash reality (heavy capex or heavy SBC); when it is lower, the business generates more distributable cash than income suggests. An OE yield above 5% from a stable business is a meaningful cash return; a negative figure means the business consumes more than it produces once real costs are counted.

Caveats

Subtracting all capex is conservative — Buffett's definition only charges maintenance capex, but filings don't separate maintenance from growth spending, so heavy reinvestors look worse than they are. Treating SBC at its full expense value is likewise a strict choice. Not meaningful for banks and insurers, where capex is not the relevant reinvestment concept.