Owner Earnings
Owner earnings measure the cash a shareholder could pocket each year without weakening the business: roughly, reported earnings plus non-cash charges such as depreciation, minus the capital spending required just to hold competitive position. The figure answers the question that matters most, which is what a business actually yields the person who owns it.
The math
A company reports $120M of net income and $150M of operating cash flow. Total capital spending runs $90M, but management concedes that $55M of it merely keeps existing plants and systems current.
Owner earnings: $150M minus $55M, or $95M. At a $1.9B market cap, the stock looks like 15.8 times reported earnings but is really 20 times what an owner could withdraw.
| Reported earnings | Owner earnings | |
|---|---|---|
| Annual figure | $120M | $95M |
| Multiple at $1.9B cap | 15.8x | 20x |
Whoever sized the position on the first number overpaid by roughly a quarter.
The trap
Assuming depreciation equals maintenance capex. In inflationary stretches, or in industries where each generation of equipment costs more than the last, replacing worn assets costs more than the accounting charge for the old ones.
Net income then overstates true earning power year after year, and the gap compounds quietly until a heavy reinvestment cycle finally exposes it.
The move
Estimate maintenance capex independently: compare total capex to depreciation across a decade, read what management labels expansion, and subtract the growth portion. Then track owner earnings against reported net income over time.
Businesses where the two travel together deserve a premium multiple; businesses where owner earnings chronically lag the income statement deserve a discount, whatever the headline P/E suggests.