Owner earnings

Owner earnings is the cash-earnings construct popularized by Warren Buffett in the 1986 Berkshire Hathaway letter. It starts from reported net income, adds back depreciation and amortization (non-cash charges), and subtracts maintenance capital expenditures — the capex required to sustain the current productive capacity, not to expand it. The output is an estimate of the steady-state cash a business throws off without growing. Owner earnings is more conservative than free cash flow because it strips out growth investment, which means it is a fair-value floor for any company in a heavy-investment phase whose reported FCF understates run-rate economics. Two implementation notes matter. First, do not subtract stock-based compensation a second time: net income already reflects SBC as a GAAP expense, so the Buffett formula does not double-count. Second, maintenance capex is rarely disclosed cleanly — we approximate it as either depreciation expense (the simplest proxy) or as the historical capex-to-revenue ratio applied to a normalized revenue base, then triangulate against management commentary. We label owner earnings as a floor value for high-growth companies (5-year EPS growth above 15%), and we do not let it drag the composite fair-value range when growth investment is creating long-duration intrinsic value above its cost of capital.