The Importance of Owner's Earnings

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Owner’s Earnings are one of the most important aspects of investing, but they are not discussed enough. Let’s review everything you need about Owner’s Earnings in this article. There are a few methods for doing this, but this article focuses on Warren Buffett’s approach, as detailed in his 1986 Annual Shareholder Letter. 

Understanding a company's earning power is crucial for making informed investment decisions. Warren Buffett places significant emphasis on "owner's earnings" as a critical measure of a company's profitability and financial health. 

Warren Buffett defines owner's earnings as the cash flow a business generates available to shareholders after covering all necessary expenses to maintain the business. This includes net income plus non-cash charges like depreciation and amortization minus capital expenditures required to maintain the company's competitive position and unit volume. 

Focusing on this metric can help investors gain deeper insights into a company's operational efficiency and long-term viability. Owner's earnings consider the business's real cash, which can be used for dividends, share buybacks, reinvestment, or debt reduction.

Owner’s Earnings vs. Traditional 

Warren Buffett uses this metric because it provides a clearer picture of a company's financial health and true earning power compared to traditional metrics like net income or EBITDA.

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