Earning can make or break an investment. We all know it. So what is new in that?
Warren Buffett Coins new term. It was difficult for me to digest that it’s not Cash flow. But yes, it’s something near to it.
Owner earnings are calculated as follows.
Earning + Non-Cash Charge – Expenses for Capital Expenditure.
If you are not from a Commerce background, it’s difficult for you to understand what it is.
Warren Buffett takes Profit and adds non-cash charges like depreciation, Amortization, etc. The company is not paying anyone that amount. It’s just a way to save for future buying from earning. If company managers decide, they don’t need to take a loan to buy any new machine. The old machine is reducing in value, and so the accounting system is giving them a chance to earn new from old. How much is that amount? Add it back. You may call it Cash flow, But it may or may not be equal to Cash.
Next is to deduct the number of Expenses for future Capital Expenditure.
As the plant and machinery are reducing in value, the company needs to plan for future Expenditure to keep itself in the business. It could be anything. Like buying a new plant. Construction of the plant. An acquisition may or may not come because Warren Buffett thinks Dividend is the best way to reward shareholders.
In simple words, Warren Buffett is showing us what the company earns in one Year for Owners.
The rule of thumb is higher, the better.
