What Is the 10-CAP Valuation Method?

Most valuation methods are complicated. The 10-CAP is refreshingly simple — it asks one question: if I bought this entire business with cash today, what return would it pay me? It treats a stock the way a real estate investor treats a rental property, and it's one of the fastest sanity checks in value investing.

The core idea

A “cap rate” (capitalization rate) is the annual cash return on a purchase price. If you buy a rental for $100,000 and it nets $10,000 a year, that's a 10% cap rate. The 10-CAP applies the same logic to a business: a disciplined value investor wants at least a 10% return on the price paid, in cash, in the first year.

How to calculate a 10-CAP value

The 10-CAP uses owner earnings — the actual cash a business produces for its owners — rather than accounting net income:

• Start with operating cash flow.
• Adjust for taxes and one-time items, and subtract only maintenance capital expenditure.
• That figure is your owner earnings.
• Divide owner earnings by 10% (i.e., multiply by 10).
• The result is the price at which the business yields 10% — your 10-CAP value.

In short: 10-CAP value = owner earnings × 10. If a company generates $2 billion in owner earnings, a 10-CAP value is about $20 billion. If the market cap is meaningfully below that, the business is potentially attractive on this measure.

Why owner earnings instead of net income

Net income includes non-cash charges and accounting choices that can flatter or depress the real picture. Owner earnings answer the question that actually matters to a buyer: how much cash can I take out of this business each year without starving it? That's why Warren Buffett has long emphasized owner earnings over reported profit.

When the 10-CAP works best — and its limits

The 10-CAP shines for stable, cash-generative, mature businesses. Its weakness is high-growth companies reinvesting heavily today — they may show low current owner earnings but enormous future cash generation, which makes the 10-CAP look expensive when the business might be a bargain. That's why you should never rely on a single method.

Run a 10-CAP in one tap

Pulling owner earnings and separating maintenance from growth capex by hand is fiddly. Moatly calculates a 10-CAP automatically — alongside Intrinsic Value and Payback Time — and rolls all three into a single fair value price with a margin-of-safety score.