owners earnings

[Fran8]

What is the calculation for owner earnings?

I have spent the last 48 hours pouring over Buffett's 1986 letter to shareholders and every website that so much as mentions the name Warren Buffett and I am still unsure.

In the letter it is spelled out as, "(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N's items (1) and (4) less (c) the average annual amount of capitalized expenditures for plant and equipment, etc..."

My problem is items 1 and 4! For a long time I have interpreted 1 and 4 to mean other non-cash items and changes in working capital. The resulting calculation is basically cash flow from operations (as shown on any cash flow statement) minus cap-ex.

Am I wrong to include all changes in working capital, deferred taxes, and other non-cash items?

The letter can be found here, near the bottom: Chairman's Letter - 1986

Please help, I need some sleep.

 

[counter_violent]

Fran ...thread moved to taxation and accounting.

You may get a better response here.

 

[luckyd1976]

What is the calculation for owner earnings?///Please help, I need some sleep.

In Warren's Case he always values (If I remember correctly) via Book value. Or his Tangible Value speak. He feels its a more fair way to judge corporate growth. Over the NetIncome/EPS way of things.

 

[fibonelli]

Page 90 of "The Warren Buffet Way" states:

".....Net Income plus depreciation, depletion and amortisation, less the amount of capital expenditures and any additional working capital that may be needed....".

He further qualifies capital expenditures by saying "...subtract the necessary capital expenditures..."

In a nutshell, he wants to calculate a best estimate of the true underlying cash flow of a business.

HTH

 

[Fran8]

Yes but on the letters to the shareholders he doesn estate owners earnings like on "The Warren Buffett Way" so should I include all changes in working capital, deferred taxes, and other non-cash items?

 

[Benji871]

EDIT: SORRY YOU ALREADY DID THE CALCULATION BEFORE - I WAS QUICK READ.

Perhaps you could try:

Go to cashflow statement then:

Look at the cash "generated from operations" - Usually the first section of the cash flow statement.

(It should show the same as the profit on the income statement) and then go upwards as it works its way back from all the acounting "non-cash" items to get profit for the period).

Then go to cash flow from investing activities (usually the second section of the cash flow statement)

And deduct "Purchase of property, plant and equipment"


If i'm not mistaken this should be the same or similar but faster.

 

[scose-no-doubt]

Do what benji says but be sure to account for interest and taxation costs and that should be a bit more accurate in terms of getting the the IS bottom line.