What Are Owner Earnings?

Warren Buffett introduced the idea of owner earnings because he distrusted reported net income as a measure of what a business actually produces for its owners. It answers a simple question that accounting often obscures: how much cash could I take out of this business each year without harming it?

Why net income misleads

Net income includes non-cash charges, accounting estimates, and choices that can flatter or depress the picture. Two companies with identical net income can produce wildly different amounts of actual cash. For a buyer, cash — not accounting profit — is what matters.

How to estimate owner earnings

A practical estimate starts with cash from operations and subtracts the maintenance capital expenditure needed to keep the business running at its current level (but not the spending used to grow it). What's left is roughly the cash owners could pocket. It's an estimate, not a precise figure — and that's fine.

Owner earnings vs. free cash flow

Owner earnings are close to free cash flow but conceptually cleaner: free cash flow subtracts all capital expenditure, while owner earnings try to subtract only the maintenance portion, separating it from growth investment. Both are far better guides to value than net income.

Why they matter for valuation

Owner earnings feed directly into the best valuation methods — they're the input for a 10-CAP and a key driver of intrinsic value. Get owner earnings roughly right and your valuation rests on solid ground; rely on net income alone and you may be valuing an illusion.

See the real cash for any company

Moatly works from cash-based fundamentals, not just headline earnings, to calculate fair value across three methods — so your analysis reflects what a business truly generates for its owners.