34. Warren Bufett's Owner's Earnings Calculation

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In this lesson, students learn the difference between accounting earnings and Warren Buffett's Owner's Earnings.
When an Investor looks at the bottom line figure on the Income Statement, they find the Net Income. This is the profit the company has produced for the given time frame. Although many use the net income to value a business, Warren Buffett takes a different approach, and calculates what he calls the Owner's Earnings.
In order to understand the concept of Owner's Earnings, one must understand the two paths that the Net Income takes after it's produced. The first path is a potential dividend payment. Any funds that take this path are immediately valued as Owner's Earnings. The remain amount of net income after the dividend payment is then used to invest back into the business. This money also has two paths. This money can be used to reinvest into the maintenance and care of the already existing equipment, or it can be spent expanding the assets of the company. If the funds flow in the first direction, called Capital Expenditures, little to no growth in the company's book value will occur. If the funds flow in the second direction, the money will add new streams of income to the business and the asset will be added to the current equity of the business. This second amount is added to the dividend and the total is referred to as the Owner's Earnings.
If a person would be interested in calculating the owner's Earnings, they could simply take the funds from the Operating Activities section on the Cash Flow Statement, and subtract it from the Capital Expenditures -- also found on the Cash Flow Statement.
Remember the true Owner's Earnings is nothing more than the book value growth and the dividends combined.

[@iceyle4230]

I have watched all your lessons and just want to say thank you so much for sharing your knowledge. You are a great teacher. I have no finance background and I understood everything you preached. I'm so thankful that you allow us to learn for free. Thank you!

[@moathalqweaz3409]

Preston Pysh thank you

[@qq798830597]

Preston Pysh Thank you so much

[@evanbranagan7663]

Preston Pysh you’re the man

[@leoscalia]

Absolutely! Thank you very much you sharing your knowledge!

[@jasongirouard4300]

I've gotta say, Preston. After watching all of your videos, I feel that you do an excellent job explaining what can be very difficult material. You simplify it so much without condescension, while still conveying the important concepts. A+ work all around.

[@valeriagalati2986]

Hey Preston, I have watched all the 3 courses and I have to say that you're absolutely amazing! After almost 10 years since you have released this course is yet one of the most valuable and detailed courses I have ever seen. You have got a real talent for teaching. Fantastic Work, thank you so much for sharing your knowledge with us!

[@ablcsteve]

Hi Preston, I admire your skills in explaining something in easy terms. It helped me a lot.

[@Romssat]

Few critics to that: 1) You fail to calculate Maintenance CAPEX, since CAPEX in the Cash-flow statement is maintenance CAPEX as well as CAPEX for growth. Some companies State maintenance CAPEX in their MDA, however you cannot see that value in the Cash flow statement. 2) When you try to calculate Actual owner earnings by summing up Dividends and BV-Growth you fail to take into account share repurchases, which usually reduce BV if they are not carried out below BV. However share repurchases, if carried out righly, cannot be neglected.

[@factsandmyths3301]

Wait how does book value decrease through buy back of shares? The cash taken out to buy shares is negative and and by buying back, the cash gets transferred into the same company which is positive, equity remains same The only thing that's gonna reduce is no of shares outstanding

[@ayeminoo2067]

@@factsandmyths3301 i think share buy back means company is buying back share from public. So cash actually move out of company and reduce equity hence reduce book value.

[@ayeminoo2067]

These are important points. I wish he explains those as well. Any link where i can learn more about those concepts and share buyback impacting book value and owner earning?

[@factsandmyths3301]

@@ayeminoo2067 Oh yeah! Now I get it Thank you!👍

[@brettsky88]

This is where ROE comes in...well spent growth capex will be reflected in the ability to maintain or even grow ROE as BV increases. Important way to gauge whether incremental capex is producing favorable returns.

[@graysumowski13]

I spent so long today looking up this principle brought to us by Buffet and I couldn’t grasp it. Thank you very much for this, this was still somewhat difficult to understand, but that is because of the principal, not you. Thank you very much!

[@ronak9983123]

Simply Awesome! Thanks for putting up great work Preston.

[@crustyburger04]

3 days for all 36 videos - thanks. really great work!

[@franciscocisneros4276]

wow this took me 2 weeks to watch all hte videos lol, nice man

[@sashith4131]

Guys if anyone is confused. Capital expenditures Preston deducts is the money the company spends on maintaining its assets(such is money spent on replacement parts for a machine).This money is like the replacement computer which does not bring any additional value for the book value in the next quarter. Therefore this is the reason why your supposed to deduct it. However you are not supposed to deduct the value of other investments such as purchase of land to grow the buisness. MSN money has changed and now capital expenditures is listed as "Investments in property, plant and equipment ".

[@vvignesh8428]

Hi Preston, your really a great teacher. All financial concept in a simple and effective way. Thank you so much for your free knowledge sharing to this world of new investors and trader in a buffet way. Keep it up.

[@MrBodisha]

I've been reading the 6th edition of "Security Analysis" by Graham & Dodd and I think your videos do a great job of explaining and confirming this book! I look forward to watching all over your videos

[@mmhsn07]

Preston:- You are the BEST. Excellent work, very well laid out courses and explained very difficult concepts and terminology in remarkably easy to understand language. It cannot be better then that.

[@leverage3359]

Preston, you are the best teacher about value investing !

[@verabudennaya5437]

Thank you Preston for such a great opportunity to understand what an investment is about.

[@tinnguyen2219]

Thank you so much for sharing your useful data! greatly appreciated.

[@undergroundplaylist]

I went through all of the lessons. Thank you.

[@Patrick-ud3vu]

You've been helping to financially educate people for years and will do so for many years to come. Thank you for your videos and dedication.

[@czechdanny9030]

This is an amazing material. Thanks very much. You rule

[@alexandert477]

Owner Earnings. A better measure of economic performance than cash flow or GAAP earnings affected by purchase accounting adjustments, equal to (a) *OPERATING EARNINGS* plus (b) depreciation and other non-cash charges minus (c) required reinvestment in a business to maintain present competitive position and unit volume.

[@israelnombrado759]

I truly love and understand the logic or sense behind your lessons and insights. Thank you so much for such great lessons Preston. I have a quick question if you don't mind. What if in getting the actual earnings, we obtain one or two negative numbers in the book value when we get the year to year difference? Thank you. :D

[@gregorioabrego]

First of all, thanks for all the rich information shared in your videos. In this video you clearly advocate for the usefulness of studying book value growth + dividends vs relying solely on owner's earnings (which is what Warren Buffet normally looks at); can you think of some other well-known investors that follow this line of thought (not depending fully on owner's earnings to arrive at intrinsic value)?

[@fanoflife123]

They need to update these lessons.

[@mark91345]

Wow! I watched this video multiple times and followed along step-by-step; however, MSN Money has changed their format so greatly, that I cannot fully do the calculations in the video. The names/rows have changed substantially. Even something like "Net Income" lists one figure under the Cash Flow statement, but a different figure under the Income statement. Sheesh! Preston, I hope you will consider doing a brand new video on this because of all the changes. Otherwise, for what I could comprehend, your video was a Godsend, because I am one of those people who needs to SEE the process. Thank you.

[@kevinehrlich6988]

You still interested in this? Cause I have the solution to your problem but I don't want to waste my time typing the comment if you're not going to see it.

[@ayeminoo2067]

You can use different website like morning star and Yahoo finance. They are pretty good. Enjoy!

[@kevinehrlich6988]

@@ayeminoo2067 Surprising to see someone else replying to this comment. Yes, but there's a secret to getting back to the old version of Morningstar which displays the financial statements in a better way.

[@Felipe-lu6sl]

@@kevinehrlich6988 well share the secret and hopefully some free knowledge! Just like Preston... ;)

[@kevinehrlich6988]

@@Felipe-lu6sl Go to buffettsbooks.com, go to course 2, go to lesson 20, scroll down to where it gives you the option to put a ticker in, put whatever stock you want to look at in and it will take you to the old version of Morningstar.

[@emilyhuynhtran9590]

You're adorable, deeply thank for your lesson. Very clarity of mind!

[@diegodejesusriveragandara7964]

This is so helpfull, thank you for sharing us your knowledge

[@GiovannivdWegVEVO]

Hi! Thank you for the video. I have a question: is it always possible to calculate owners earnings by doing [cash provided by operating activities - capital expenditures] / shares, or are there somethings things included in this "cash provided by operating activities" calculated number on the cash flow statement that we should not use in the calculation? In other words, does the calculated number of "cash provided etc" on the cashflow statement entail everything we need or should we calculate everything separately, using the definition of warren?

[@rogerjones5970]

Hi Preston, awesome video. Should finance companies be viewed differently? I was looking at one which had quite large swings in cash flow from operating activities (I think the AR was saying they were originating more loans ($ out) than what they were selling to 3rd parties ($ in) in a couple of years. Your 'Actual Earnings' came out very well but the Owner EPS swung quite large in a positive and negative directions....so was a very different comparison to your Walmart example.

[@StasB101]

hey, Preston, will it be possible for you to make videos about mutual funds, trust funds, options, futures, etc?

[@yewchoobar1673]

Not sure this is correct. Cash from Operating Activities includes change in working capital, stock based compensation, cash from discontinued operating activities etc. All of these should not be included in owner earnings: For working capital the business could have received a large upfront payment but this does not reflect true earnings. Stock based compensation is diluting the earnings so should not be included as true earnings. Discontinued operating activities will not show up in future earnings so should not be used.

[@cowpong88]

Hi Preston, what is a good way of calculating capital expenditure if it isn't specifically listed on the cash flow statement?

[@dbredda]

First of all, great channel! Thank you for you dedication! Just one question... What could be the difference between the Owner's Earnings calculated by the formula (CASH FROM OPERATING ACTIVITIES - CAPITAL EXPENDITURES) and the Actual Earnings (Dividend + Book Value Growth)? Once again, Thanks!

[@eswarakrishnanvenkatasunra9619]

I too am waiting for the answer. Do comment if someone knows. Thanks

[@AnupamRoongta9]

@@markke1017 so the "actual earnings" and "owner's earnings" should be same in case of no buyback or equity dilution, right?

[@UrbanJournal]

Owner’s earnings (free cash flow) represents the earnings that could potentially be returned to shareholders because the business doesn’t need it to operate. (Cash from Ops - Cap Ex). Keep in mind that the company has still options other than returning it to the shareholders. (Paying down debt, acquisitions, building up cash position on balance sheet, reinvesting it back in the business, or share buybacks (another form of returning value back to shareholders) The actual earnings represent what the shareholder actually received in the combination of dividends and book value (shareholder’s equity)

[@factsandmyths3301]

When you subtract cash flow from operating actives by cap ex It's gonna give out free cash flow How can that be owner's earnings?

[@sashith4131]

Free cash flow is after accounting for financing activities and and investing activities. Owners earning does not account for these values.

[@adelhesari2935]

I have the same question....

[@sivi9741]

Well yes . From what I understood, the term owners earning comes from a letter in 1986 by buffet , indicated in the video . Cash flow statement appeared after the 1987 crash if my memory serves me well . Making it easier for us .

[@kennethd.6154]

Hi Preston, is there an instance where owners earnings is higher than accounting earnings. Thank you. 🤔

[@VS-ic3by]

how do you calculate the ratio of the operatings activities and capital expenditure??

[@rogerjones5970]

Is using the 'Actual Earnings' (Book value growth) method useful since intangible assets are ignored and many modern companies such as in the technology and service industries are more highly skewed toward intangibles such as human capital and IP?

[@Deepskies1]

Hi Preston, Why didn't we account for preferred dividends in the calculation of owner's earnings, as a common shareholder I have no right on those dividends and I'm only interested in what goes into my pocket, logically, I would subtract preferred dividends along with capex from operating activities, doesn't that make sense?

[@ayeminoo2067]

Why do you think apple book value is not growing at all while they are not paying divident?

[@bsykesbeats4013]

7:15 so if buying new equipment doesn't materialize into more book value, that means that companies don't have to amortize the depreciation of their assets on the balance sheet? Because you would think that replacing old equipment with new equipment that is certainly worth more would raise the assets by at least a little bit if companies are amortizing depreciation of equipment, which I was always under the impression that they had to do.

[@antonshynkaretskyi4077]

I don't quite understand why buying a new computer makes part of the earnings disappear. New computer is a tangible asset, so the value of a new computer should materialize into book value as well. Then you say that "old computer being discarded". But if it has any value after deducting deprecation, this value should materialize into earnings, because this computer could be sold, for example. And if an old computer is worth nothing, it doesn't influance equity. _________ Where am I wrong? _________ The only thing I can come up with is that when you buy a new computer, it's value drops right away, because it's not a new computer any more. That's where PART of the money spent on a computer might disappear.

[@victormanuelalvesortiz2853]

hey nice video but i learned the capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. so as they can upgrade assest to increase productivity the number isnt accurate, to make more precisely doesnt would be better to use MAINTANACE CAPEX instead of just CAPEX? sorry for any english mistakes, still learning.

[@hellochung478]

is acquisition of intangible asset is considered as the capital expenditure as well to derive the owner's earning ?

[@JamesAndrewMacGlashanTaylor]

Hi Preston! Question: What accounts for the difference between Owner's Earnings and Actual Earnings? In the breakdown at the end, under the "What's The Point of All This" section, you said that "owner's earnings is two things: Book Value Growth + Dividends". But this formulation is what you called "Actual Earnings" in a previous slide. Whereas "Owner's Earnings" was some number greater than Actual Earnings but less than Accounting Earnings/ EPS. Something is flying over my head. Can you see why someone might be confused? Is this something that can be cleared up briefly in a reply? If not, no worries. I know you are busy. Thank you so much for this great course!

[@georgipopov2754]

Where can I find a website where the Capital Expenditures of a company are listed?

[@rajatbhagat8991]

Hlo sir, I love your vdo I have a question where we find in which ratio comapny distributes their owner earning money between dividend and business?

[@danaashforth8742]

I am actually a qualified ACCA accountant, but I don’t work in the field so I forgot a lot of things, and now that I’m interested in investing/day trading, this is so helpful, so thank you

[@YugalJindle]

Often the capex has future-investments incorrectly reported as capex, in that case you don't subtract capex (or that part of capex). This often happens for tech companies.

[@StasB101]

what do we do if capital expenditures are positive? do we still need to find the difference between them?

[@GiovannivdWegVEVO]

How did you calculate the added book value at 18:45? What is the formula for this

[@vinbat1990]

Great video...1 question.Isnt CFO-CAPEX=FREE CASH FLOW..if yes, then is owner earnings and free cash flow same?

[@omidali518]

Great video Preston. Can someone please help clarify one thing I am confused about. At 18:57 you can see the book value of "actual earnings" changing each year from 2008-2012. In the year 2012, for example, there is a book value of $1.37, my question is how was this book value calculated? I could not figure out where he derived those numbers from. I thought owner's earnings less dividents paid would be equal to actual earnings. Thank you in advance.

[@computerkopman123]

Book value = Equity (Assets-Liabilities) divided by the number of shares outstanding. Book Value means the exact same thing as Equity (which is found on the balance sheet) except that book value is equity measured on a per share basis.

[@ryanphua6413]

Preston, I was just doing a calculation for a few stocks and observed that there are companies that have a negative value once you take the net cash flow from operating activity and subtract the capital expenditures. That would mean that the owners earnings value would be a negative value automatically. However, these companies can still achieve book value growth as well as pay out dividends to its shareholders. How is this possible? Also the net operating cash flow value might be negative once you subtract the net working capital from it and thus we cannot even continue deducting capital expenditure from that value as the value is already negative. Shall we ignore the changes in working capital in the calculation of net cash flows from operating income? I saw the definition included the changes in working capital but your examples do not. Look forward to hearing from you. Thanks, Ryan

[@ryankung3244]

+Ryan Phua, according to my understanding, it is possible. After watching this video, I think Warren Bufett's Owner's Earnings is really all about how much CASH the company is earning for the period. If you had learnt accounting in the past, you might know that the earnings we found in comprehensive income statement are accrual based earning, or in another other word, the earnings based on the judgement of when transactions occurred and when cost were incurred instead of when cash is received or paid(cash based). The procedure taken to calculate Bufett's Owner's Earnings is really an imitation of indirect method for deriving an operating cash flow(Look up in Cash Flow Statement) but a simpler version. If you want to know more about indirect method check out the accounting textbooks they explain it really well. NOTE: biggest difference is that indirect method does not take CAPEX into account. To put it simpler, Owner's Earning should roughly be equal to Operating Cash Flow(From Operating Cash Flow Section) minus CAPEX(From Investment Cash Flow Section). Those two items are from CASH FLOW STATEMENT(Cash based accounting). Notice that one earning is accrual based(The earning we started with) and another cash based(Bufett's earning). When there is a book value growth, it meant the earnings are positive(Assuming there is no debt repayment, or just assume there is no debt) From my experience, companies can have positive earnings(accrual) with negative cash flow(cash). Why? Think of an extreme case and you will understand. If a company produces a positive earning, it will cause book value grwoth(keep in mind, none of the earnings are used to repay debt), however, all these earnings were all not received in the period and recorded as receivables. The expense during the period regardless still needs to be paid. With all these conditions apply, the company will result in a positive earning(book value increase) and a negative cash flow(0 cash inflow - inevitable cash outflow). This is just a hypothetical situation, which rarely happen to real company but it at least tells us that the situation you described is possible.

[@teesemmel]

Hi Preston, thanks for the video and the great explanation. I ran the numbers for CSCO and have a question for that. Based on the Morning Star Data (financials.morningstar.com/cash-flow/cf.html?t=CSCO&region=usa&culture=en-US) and for example for 2015: Net Cash provided by operating activities: 12552 Capital Expenditures: 1227 --> Owners' Earnings: =11325 But now the net income is lower (8981) is lower than the owner's earnings. Is that possible? Thanks in advance!! Max

[@Tuxster3]

Isn't including changes in working capital in the owner earnings formula a mistake? I mean, companies can easily pump up their operating cash flow by holding off payment to its suppliers? So, this would artifically make cash flow from operations look better than it is really, right?

[@dodgingdurangos924]

Free cash flow to equity (FCFE)??

[@ablcsteve]

I just have one confusion when I implement your approach to compare the 'accounting earning' and the 'actual earning'. In my particular case, I found that in the past 10 years, this company produced a total $18.28 accounting earnings (i.e. sum of the EPS) and a total of $26.47 actual earnings (the dividends and growth in book value). Do you have a good explanation of why might the actual earnings be greater than the accounting earnings? I would appreciate your effort. Look forward to hearing from you.

[@PriyanshuMani]

+Cheng Liu It might be a very big company which is continuing with paying high dividends despite not having enough earnings.

[@richardalexander6993]

Question: Around minute 17 in the video, it shows the difference between (i) Accounting Earning vs (ii) Owner's Earnings vs (iii) Actual Earnings. I understand the difference between (i) Accounting and (ii) Owner's Earnings. Can someone explain the discrepancy between (ii) Owner's Earnings and (iii) Actual Earnings. Why did they not equal? I though the point of calculating (ii) was to determining the "Actual" Earnings accruing to the Owners. Thanks and great video!

[@potnudles]

It's the total value gained from his share. its the money paid to him in dividends and the money invested into growing the company. Both are going to create value for his share of that company.

[@potnudles]

if the company didnt re invest into the business, and paid him all in dividends, he would get more money in his pocket, but his share isnt gaining any value, because the company wouldn't be growing.

[@augustusg857]

I'm confused on how can the owner's earnings(fcf) be reinvested into the business. You do capex subtracted from cash from ops if so the fcf cannot be reinvested back. If owner's earnings would've been calculated only for capex maintenance then I can see how it can increase bvps because of the reinvestment into new assets in ppe which would add to the balance sheet's total assets and in turn equity in B/S.

[@mananshroff3909]

Hello Preston, Nice video...However I am thinking that you have forgotten to add stock buyback that Walmart has done during this period. If you add those number to your calculation with book value change + dividend, that would be exactly the same as an owner earning. Since stock buy back is also considered materiliazed earning for his owner. So Your actual earning = Owner earning if Book value change + dividend + Amount spent by company for stock buyback.

[@TheJPNinja]

Manan, since Preston is using per share numbers, the amount spent by the company for net buybacks are implied by the varying share count over the time period. So no need to factor this amount in. But, if he were not using per share numbers, then you are correct that he would need to do the following: aggregate change in BV + dividend payout + stock repurchase amount - stock issuance amount

[@divyajeet001]

Thank you

[@sevjon41]

hi preston. ive calculated some negative owner's earning. what does it mean?

[@kahlschlag17]

Shouldn't investment in a replacement computer be expensed in the income statement before deriving EPS?

[@ronniev3882]

how did you ever get the difference in book value for example? was trying to figure it our myself for toyota but I cannot seem to figure out which numbers to substract aside from dividends. BTW, great video.

[@computerkopman123]

Book value = Equity (Assets-Liabilities) divided by the number of shares outstanding. Book Value means the exact same thing as Equity (which is found on the balance sheet) except that book value is equity measured on a per share basis.

[@ronniev3882]

Thanks

[@jim8937]

The investment on the new computer would be taken into account BEFORE net earnings/EPS

[@ryankung3244]

I wonder why at 7:23 you mentioned invested in a replacement will cause the $0.5 be gone, wouldn't it be capitalised? Even if money spent is not capitalised to become an asset, which may be something like R&D, wouldn't it be expensed for the period? If so, aren't they already taken into account to EPS?

[@marcelspaans7183]

+Ryan Kung i have the same question, can someone explain this to me please

[@johnphillips4887]

He's assuming the old computer would be replaced by the new for the same asset value. It is assuming a lot of things, that the old computer was valued at replacement cost, the old computer was scrapped for zero.

[@potnudles]

John Phillips < he knows ^

[@WillChousThoughts]

It wouldve have been so much better if the highlighting wasnt screwed up. regardless, still great

[@Rohirim98]

Is it possible, that the amount of owner's earnings is lower, than the amount of actual earnings?

[@SmismaSmeidl]

Hi folks, I am a bit confused. So the growth of book value equals the growth of equity, for my understanding. One short example: Company XY is NOT repurchasing or issuing any stock, has a net Income of 10 and is paying a dividend of 1. So the retained earnings as stated in the Balance Sheet should be 9 and this equals the growth of equity. Growth of Equity=Retained Earnings=NetIncome-Dividend!!! So back to the video, if you add the growth of book value to the dividend, you will end up with the Net Income as stated and not with some form of owner earnings??? Can someone help me with that?

[@AlexanderTiburcio-mt3uz]

Do you also add share buy backs

[@robertocanales1201]

Thank you very much! 😑🙏🏼

[@SoniBrosInvesting]

Great video, very thorough explanation. My channel is also about value investing however, our strategies are derived from many value investors. Keep up the great work!

[@gmo709]

Isnt what you did, the FCF (Free cash flow)? I thought that the owners earnings FCF is usually different from that, but i can just use FCF. also, it is good to do a TTM using the 10Q or quarterly numbers to get the TTM FCF. You spoke of the ratio between Op activity and capex, but you can just use the % change in FCF to see jumps or dives, right? FCF % changes would reflect how that ratio changes. You can see a % of that instead of eyeballin it. Where is there a site where i can export the numbers out...for free? Doing this manually would take a while to show trends. Copy and paste doesnt work well. What i want to do is see the truer trend for cash flow.

[@sashith4131]

he didnt do FCF calculation because free cash flow is after deducting financing activities and investing activities such as purchasing new assets. Owners earnings is more than FCF per share because FCF does not account for growth in book value due to purchased assets such as land .

[@al-ameen7672]

The same calculation is called free cash flow then what is the difference between free cash flow and onwers earnings

[@zSatherz]

Can't capex be used to increase book value and expand the business? Not just for replacing assets already owned?

[@potnudles]

expanding business, (more trucks, more premises, new product range) would be under Investing activities, right? buying more of the same stock wouldn't be in capex, i think.

[@sashith4131]

@@potnudles yea you are correct

[@g0ds0n123]

I can't find Capital Expenditure in the Cash Flow statement. I think the layout has changed. Someone please help. And How did you get Diluted Outstanding Shares?

[@ryanphua6413]

g0ds0n123 Hey man i think capital expenditure in the cash flow statement can also be purchase of property and equipment! Some other article on owners earnings used that value.

[@Bao8892]

Hi Preston . Would like to ask since Msn Money has changed, Can I use the operating cash flow from Morningstar though they have added extra inventory, accounts payable and accrued liabilities for Walmart. Is it still legit or we still have to calculate using Buffet's method ?

[@Rohirim98]

The number of total operating cashflow given on morningstar and used in this video is the same, so i guess u don't need to calculate that number.

[@mudbath25]

For the chart time should really go from left to right instead of right to left which is confusing…otherwise it’s a great video!

[@dreamdancer84]

Is there any difference between owner's earnings & free cash flow? I've looked up many sources & all say different things..

[@rrurban]

thank you for your video, very nice! however, I see nowhere in his 1986 definition of "owner earnings" where it says to include "changes in working capital". put another way, changes in working capital is not a sustainable source of cash flow. as a business owner you can pay off vendors late in one period and thus you show more free cash flow, but this is not sustainable as you'll have to pay off the vendors in the next period - it all averages out in the end. i would not include changes in working capital as owner earnings. taking CFO - Capex is a standard definition of Free Cash Flow, but I do not believe it is the true definition of Owner Earnings. what are your thoughts on this? thank you

[@BBFletcher4202]

Is this basically free cash flow divided by no. of shares?

[@StasB101]

so Preston will it be possible? or better find some other ways?

[@lukeleeAu]

I am a bit confused. Why do we plus Depreciation and Amortization? They are the money we lose, right? Sorry about the nieb question.

[@svk4543]

Depreciation is a 'phantom' loss. Lose no money but get to write it off as an expense come tax time! To really understand how great that is buy a rental property and complete Schedule E. Amortization is more simple. Again a Real Estate example. Buy a house on a 15 year mortgage and rent it out for PITIM (Principal, Interest,Taxes, insurance and Maintainance costs) fast forward 15 years and the mortgage balance is ZERO - Look back and think how and when did this happen ? U R Welcome.

[@utsavdua3691]

svk4543 It's not a phantom loss because eventually certain fixed assets will become obsolete. The cost of this is written off gradually over the years - that's all. This is why I believe "owner's earnings" is a flawed valuation.

[@nik11411]

Because although it is shown as an expense, there is no cash involved. So to make sure the cash flow isn't affected by it, you add it back as you didn't really lose that money. Hope this helps.

[@lukeleeAu]

Ah, thank you for the explanation.

[@investmentforbeginners9115]

Superb. Thanks for doing this. I am subscribing now. At 17:26 how do you calculate: the change in book value for 2008. Do you not need the book value for 2007? Where did you get the book value for 2007? From my understand MSN Money only gives previous 5 years finances. Is anybody able to help me?

[@rogerjones5970]

You can get get 10 years book value growth at Morningstar but only 5 years of Free cash flow (Owner earnings), bottom of cash flow statement - at most sites 5 years is free and 10 years is premium content so you have to pay.

[@Alfoncos]

Are owner's earnings the same thing as Free Cash Flow?

[@YogeshRana-fg8jr]

Damn bro. I always wondered why all the profit is never materialised as Shareholder's earnings. Now I know.

[@Maxwell-237]

Hang on 50c goes into a new computer. Wouldn't the old computer have been depreciated to zero and then the replacement would revitalise that book value? Why is there no change in book value?

[@sashith4131]

no they would just throw the old computer, away.This would be deducted as a loss in the balance sheet which will be balanced out by the new computer. Thus leading to no change in the book value.

[@rrurban]

Owner Earnings will be less for companies with debt. Ignoring this will give inflated valuations and is a mistake. Debt pymts are principle + interest. Interest is already expensed on the income stmt, which leaves net income, the first line on the cash flow stmt. Principle payments on debt have been excluded in Buffett's owner earnings calculation (as if they don't exist). The way around this is to do a DCF, then add cash and subtract long term debt, to arrive at an Enterprise Valuation. It's by no means perfect but it does its job of making indebted companies less valuable (as they should be).

[@sharloff]

Rob Urban Nice stuff, Rob. Thanks. I gotta say I'm a little confused by this calculation. In the beginning of the video, it was assumed that a dividend was included as Owner's Earnings, what is not? So, didn't we complete ignore this value in the Financing Activities section of the Cash Flow Statement? Obviously, that should increase the OE valuation. Am I wrong?

[@rrurban]

Companies with debt are worth less and higher risk. Companies with a lot of cash are worth more. Run a DCF to get a valuation. Then add cash and subtract debt from that valuation. Debt will get you into trouble, cash will help you.

[@computerkopman123]

I just did this for a company and came up with the following 5 year figures; can someone explain what the following figures would mean: Eps: 12.97 Owner's Earnings: 3.23 Actual Earnings (Dividend + Book Growth): 10.39

[@sashith4131]

looks like a relatively unstable business, or you did ur calculations wrong

[@ahmedmoustafa6829]

What is the difference between owner earning and actual earning? This is not clear

[@sashith4131]

owners earnings is your estimate on how much the actual earnings will be. However when the owners earnings is invested into the business it is not 100% efficient to cause the exact increase in book value. Thus actual earnings is the net value after accounting for losses due to inefficiencies of investments. Therefore actual earnings is a far better statistic to use to predict the growth of your equity held in the business.

[@apex12122]

So where did the extra $ of the earnings go ? So in this case wal-mart didnt invest that extra $ from EPS smartly?

[@ims7865]

Owner earnings= operating cash flow- maintenance capex!!! Easy.

[@heishephaestion4178]

apparently its free cash not operating cash

[@pravbr]

Cashflow from operations minus maintenance capex

[@ims7865]

@@pravbr corect. sorry. my mistake

[@jacquesuckardes8606]

I comes whit higher owners earning than eps, how is that possible?

[@marcolancioni2942]

TOP! That's all!

[@dallaschan2840]

Dear Preston, No offence but i strongly disagree with you. You have explained owner's earnings probably as well as how I understand it, however I noticed you mainly focuses on book value growth and dividend when determining a company's intrinsic value without incorporating owner's earnings, even though you mentioned it is a holy grail found in the investing world. If Buffett really had evaluated Scott Fetzer using the your method, he wouldn't have bought it at 100% premium over its book value, that would have been against his principle of margin of safety. Instead, Buffett must have calculated an intrinsic value far higher than its book value (probably >120% over book value),then applied a margin of safety (probably >20%) to justify buying it at 100% premium. Let's say: Book value $100 Inrinsic value $300 20% Margin of safety $60 Purchase price $200 The purchase price of $200 is 100% over the book value but is still a bargain considering the calculated intrinsic value less margin of safety is still worth $240. Buffett said "percentage change in book value will approximate the percentage change in intrinsic value", but he never says change in book value "is" the change in intrinsic value, also never said book value '"is" intrinsic value, hence i believe your method is flawed. To my fellow value investor, I recommend reading yourself Buffett's writings and to always maintain a scepticism against all "experts", "gurus" etc. Many of these are educator/preacher in the name of Buffett, but they may never convey his message in truth. Maintain your own judgement so we can have constructive arguments and learn from each other.

[@michaelatkinson1949]

Chan Kar Chue he talked about it in the earlier lessons

[@dallaschan2840]

@@michaelatkinson1949 Hi Michael, mind to share more? Which lesson was it? What did he say?

[@michaelatkinson1949]

​@@dallaschan2840 I miss spoke, I'm trying to figure this out myself.

[@TherealElijhawatkins]

11:35

[@jona457]

Thank you