Buffett's Favorite Profit Formula



Ever look at a company’s net income and feel like you’re not getting the full story? Warren Buffett felt the same way. He believed standard accounting profits didn't show a business's true cash-generating power.



That’s why he created his own metric: **owner's earnings.**



The goal is to figure out how much cash an owner could pocket at the end of the year without damaging the company's long-term health.



The formula is straightforward:



**Owner's Earnings = Net Income + Depreciation & Amortization - Maintenance Capital Expenditures - Additional Working Capital**



The most important—and trickiest—part of this formula is "Maintenance Capital Expenditures."



What's the Deal with CapEx?



On a company's financial statements, you'll see a line for Capital Expenditures (CapEx). This is all the money spent on big-ticket items like factories and equipment. But this total figure mixes two different kinds of spending:



1. **Growth CapEx**: Money spent to expand the business (e.g., building a new factory).
2. **Maintenance CapEx**: Money spent just to keep the business running as is (e.g., replacing old, worn-out machines).



Buffett’s formula only subtracts the maintenance portion. After all, replacing old equipment is a real cash cost you can't ignore.



The Easiest Way to Estimate It



So, how do you find this maintenance number? It isn't listed on any report. For a quick and easy estimate, many investors use the **Depreciation & Amortization** figure as a proxy. The logic is that the amount a company writes off for aging assets should be roughly what it costs to replace them. While not perfect, it’s a solid starting point.



Understanding owner's earnings helps you see past accounting conventions to the real cash flow a business generates, giving you a much clearer picture of its long-term value.

Owner's Earnings per Share