Owner Earnings

Owner earnings is Warren Buffett's definition of what a business truly earns for its owners: reported net income, plus depreciation, amortization, and other non-cash charges, minus the capital spending required to maintain the company's competitive position. He laid it out in his 1986 shareholder letter as the number that matters for valuation, calling reported earnings and cash flow both misleading on their own.

The difference from free cash flow is the capex line. FCF subtracts ALL capital expenditures; owner earnings subtracts only MAINTENANCE capex, on the argument that money spent on growth is a choice, not a cost of staying in business. The catch is that companies do not report the split — estimating maintenance capex is judgment, and Buffett said as much in the same letter.

For capital-light businesses the two numbers converge. For heavy spenders they diverge sharply, and the direction of the gap tells you whether reported FCF is understating a grower or flattering a company that is quietly underinvesting.